July 6 (Bloomberg) -- Hong Kong Financial Secretary John Tsang said the economy probably returned to growth in the second quarter after a record contraction in the previous three months, as demand for exports improved.

“On a quarter-on-quarter basis, there is a large chance that there may have been growth,” Tsang told legislators today. That compares with a seasonally adjusted 4.3 percent decline in gross domestic product in the first quarter, the biggest fall since data began in 1990.

Hong Kong’s exports fell more slowly in April and May, adding to signs that global demand is stabilizing after the worst financial crisis since the Great Depression. In Japan, central bank Governor Masaaki Shirakawa said today that his nation’s exports and industrial output are recovering after unprecedented falls.

“The worst is over,” said Kevin Lai, an economist at Daiwa Institute of Research in Hong Kong.

Hong Kong’s Hang Seng Index rose 0.7 percent as of 11:24 a.m. local time. The benchmark has soared about 60 percent from a more than four-month low on March 9 as investors speculate that stimulus efforts worldwide will revive growth.

In another sign that the economy is recovering, home prices have climbed 19.3 percent this year, to the highest since the collapse of Lehman Brothers Holdings Inc., Centaline Property Agency Ltd. said last month.

The economy’s contraction in the second quarter from a year earlier was probably smaller than the 7.8 percent decline in the first quarter, Tsang said today.

Tax Cuts, Stimulus

The financial secretary previously forecast Hong Kong’s economy may contract as much as 6.5 percent in 2009 after demand plummeted for Chinese goods shipped through the city. He didn’t update that estimate today.

In May, the government rolled out a new round of relief measures, including an increased salary-tax cut, an extended waiver for property rates, and rent subsidies for public-housing tenants. Hong Kong has budgeted HK$87.6 billion ($11.3 billion), or about 5.2 percent of gross domestic product, for stimulus and relief spending since 2008, according to Tsang.

Unemployment, which is at a three-year high of 5.3 percent, is under pressure to keep rising, the financial secretary said today. The elevated jobless rate has dragged down consumer spending, making it harder for the government to revive growth.

Sa Sa International Holdings Ltd., the city’s largest cosmetics retailer, last month reported a drop in profit and forecast a “challenging” year ahead because of the global financial turmoil and swine flu.

To contact the reporters on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net; Kevin Hamlin in Beijing at khamlin@bloomberg.net

Last Updated: July 5, 2009 23:49 EDT