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PMI shows Hong Kong SAR economy suffering biggest fall in output for over two decades
05 November 2019Bernard Aw
IHS Markit Hong Kong SAR Whole Economy PMI™ sinks to lowest
since November 2008
Protests and trade wars blamed for steepest output fall since
survey started in 1998
New orders fall sharply, dragged down by record fall in demand
from mainland China
Business sentiment at new record low
Hong Kong SAR's private sector remained mired in one of its
worst downturns for the past two decades during October, according
to the latest IHS Markit PMI data. The survey also brought signs of
a deepening economic malaise, as the impact of the ongoing
political unrest and a worsening global trade environment continued
to dampen business activity and hurt investment.
With PMI data signalling accurately (and well in advance) the
steep GDP decline in the third
quarter as indicated by official data, October PMI results suggest
the economy is heading towards a deeper recession in the final
quarter of the year.
Economic woes
The IHS Markit Hong Kong PMI™ fell from 41.5 in
September to 39.3 in October, indicating the worst deterioration in
the health of the private sector economy since November 2008. The
latest reading is consistent with GDP contracting at a year-on-year
rate of close to 5% at the start of the fourth quarter.
The latest decline means business activity shrank for a
nineteenth straight month, marking one of the deepest and longest
downturns for the past 20 years.
The PMI is a composite index based on five key survey variables,
some of which showed even steeper declines. Most notably, output
fell to the greatest extent since the survey began in July 1998,
often attributed to demand being hit by protest-related disruptions
and increasing trade protectionism. New business intakes showed the
steepest decline since the start of 2009.
Driving the reduction in demand was a record drop in orders from
mainland China, as well as another sharp fall in overseas
sales.
Delving further into the survey details revealed particularly
steep sales declines in the services and wholesale/retail sectors.
Anecdotal evidence also continued to highlight that retail and
tourism sectors remained affected by the domestic situation.
Business gloom intensifies
As overall demand conditions continued to worsen, private sector
firms became increasingly pessimistic about the outlook. Business
expectations about output in the year ahead fell to the lowest
since data on this indicator were first available just over
seven-and-a-half years ago. Companies were especially concerned
about the impact of protests and a deterioration in the global
trade environment on economic activity.
Rising costs
Adding to the economic woes were rising input costs. Following
three months of decline, overall input prices rose in October,
driven by a combination of higher prices for purchases and
increased wages. Firms not only had to absorb the rise in costs
amid the economic downturn but also provided price discounts to
boost sales, thereby compressing margins. Prices charged for goods
and services fell for a fourth month running, though the rate of
decrease moderated from September.
Outlook
With headwinds from China-US trade conflicts and political
crisis showing no signs of letting up in coming months, the worst
for the Hong Kong SAR's economy may still not be over yet. Should
the city-wide unrest extend over to next year with a further
escalation in protest violence, we expect a 0.2% decline in real
GDP for 2019, followed by only a marginal 0.1% rise in 2020.
In the meantime, strong volatility in the local stock market is
expected, with the PMI pointing to greater downward pressure on
equity prices.
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
