Hong Kong Economy | March PMI drops to 49.3, first contraction in seven months

Business conditions in Hong Kong deteriorated in March. S&P Global reported that after seasonal adjustment, the Hong Kong Purchasing Managers’ Index (PMI) for March reversed the seven-month expansion streak. It fell from the 35-month high of 53.3 in February to 49.3, below the 50-point line of stagnation, marking the first contraction since August last year, reflecting that business conditions returned to a contractionary range, albeit with a slight change.

S&P said the fighting in the Middle East has hit market demand, causing output and new business to contract 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 significantly raise prices, firms proactively purchase more, which in turn pushes inventory levels higher. The increase in employment helps ease backlogs; however, businesses expressed concern about the impact of the fighting in the Middle East, so they have become more pessimistic 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 phase that had lasted for five consecutive months. Surveyed businesses said the fighting in the Middle East has affected consumer confidence, stock market performance, and customers’ willingness to spend, thereby impacting sales. The export trade decline was similar in magnitude, ending an expansion period that had lasted four months. However, order demand from China moved in the opposite direction—it has risen for six straight months, though the pace of growth has slowed, and overall it remains moderate.

As demand weakened, companies shifted gears to cut production. Although the decline in business was mild, it ended the upward trend since August last year. Output and new orders both tightened in March; however, companies again expanded headcount, and employment growth was moderate—around the largest in nearly two years.

Survey data show that inflation pressure faced by private companies eased further. Many companies said that due to intense competition, they had limited room to raise prices. When assessing business over the coming year, companies were more pessimistic than last month. The March pessimism was the worst since July last year, and several surveyed companies said that the fighting in the Middle East has affected the world.

Annabel Fiddes, Deputy Director of S&P Global Market Intelligence Economic Research, said companies reported that the fighting in the Middle East has hit market demand. As a result, in March, private-sector output and new orders in Hong Kong tightened at the same time, unlike the solid growth seen in the first two months of this year. Surveyed businesses said that weakening customer confidence and spending power put pressure on local and export order demand, though fortunately, sales from mainland China have continued to expand.

Annabel Fiddes said another encouraging factor is that inflationary pressure has continued to cool, especially procurement prices. However, war could disrupt market activity and supply-chain operations, and many companies expect suppliers to raise prices. In response, they significantly increased procurement in March to further replenish inventories. In addition, business confidence that was at a rebound turning point last month slipped deeper into a contractionary range in March, because companies expect customer demand to be weak over the coming months.