Hong Kong Economy | March PMI drops to 49.3, first decline since August last year

Business sentiment in Hong Kong worsened in March. S&P Global reported that after seasonal adjustment, the March Hong Kong Purchasing Managers’ Index (PMI) reversed the seven-month expansion streak, falling from February’s 53.3 (a 35-month high) to 49.3, below the 50-point breakeven line, marking the first contraction since August last year. The reading indicates that business conditions have returned to a contraction zone, albeit slightly.

S&P Global said the fighting in the Middle East has disrupted market demand, causing output and new business to shrink at the same time. The rate of increase in overall input costs and selling prices slowed, and inflationary pressure cooled accordingly. However, because companies expect suppliers may raise prices significantly, firms stepped up purchasing, which in turn lifted inventory levels. Employment rose, which helped ease backlogs; however, businesses expressed concern about the impact of the Middle East fighting, and therefore are more cautious about production over the coming year.

During the period, the decline in new orders was the largest in nine months, and it also reversed a strong expansion stretch of five consecutive months. Surveyed firms said the conflict in the Middle East hit consumer confidence, stock market performance, and customers’ willingness to spend, thereby affecting sales. The fall in export trade was similar in magnitude, ending a four-month expansion period. However, order demand from China moved in the opposite direction—rising for the sixth consecutive month—though the pace of increase has slowed, resulting in only a mild overall gain.

As demand weakened, companies shifted gears to cut production. Although business downturns were mild, it ended the upward trend since August last year. Output and new orders both contracted in March, yet firms expanded headcount again, with employment growth remaining modest—nearly the largest in about two years.

Survey data showed that inflation pressure faced by private enterprises eased further. Many firms said that due to intense competition, there is limited room to raise prices. When assessing business conditions for the coming year, companies were more pessimistic than last month. The pessimism in March was the worst since July last year. Several surveyed companies said they believe the fighting in the Middle East has affected the world.

Annabel Fiddes, Deputy Director of the S&P Global Market Intelligence Economic Research Department, said that firms reported that the fighting in the Middle East has impacted market demand. As a result, in March, Hong Kong private enterprises saw output and new orders tighten at the same time, unlike the resilient growth in the first two months of this year. Surveyed firms said weaker client confidence and spending power pressured order demand for both local and export markets, although sales from Mainland China continued to expand.

Annabel Fiddes said another encouraging factor is that inflationary pressure continued to cool, especially procurement prices. However, war could disrupt market activity and supply-chain operations. Many companies also expect suppliers to raise prices, so in March they increased procurement substantially to further replenish inventories. In addition, business confidence, which was at a rebound turning point last month, dipped deeper into the contraction zone in March because firms expect customer demand to remain weak in the coming months.