Hong Kong: PMI edges up but remains in contraction for 15th month running in June
The Nikkei Hong Kong Purchasing Managers’ Index (PMI), released by IHS Markit, rose from 46.9 in May, the lowest reading since June 2016, to 47.9 in June. Despite the rise, the index remained below the 50-point threshold that separates expansion from contraction in the private sector, where it has been since April 2018.
The overall economic picture was little changed in the month, despite the modest improvement in the headline reading. New orders continued to fall at a brisk pace, weighed by the U.S.-China trade war—orders from the mainland declined at the sharpest pace in three-and-a-half years—and recent local protests. Against this backdrop, firms continued to lower output, clear backlogs of work and reduce headcounts.
Consequently, supply-side activity again declined, as firms reduced purchasing volumes while continuing to tap into existing inventories. On the price front, input cost inflation inched up but remained below its historical average, driven by wage and raw material price increases, while output charges were raised only marginally. Finally, business sentiment remained pessimistic for the year ahead outlook. Survey respondents singled out the U.S.-China dispute as a main factor for gloom, as well as the recent bout of unrest regarding a proposed extradition bill—which led to sustained large-scale protests against the government—and intense competition.
The outlook is likely to remain dire in months ahead, despite the relatively positive outcome of the G20 meeting between Xi Jinping and Donald Trump on 29 June. While bilateral trade talks restarted, a number of our panelists “see little evidence that any substantive progress has been made in bridging the gap on key, long-standing issues”, as Nomura researchers put it, and thus “continue to believe that the US will move forward with additional tariffs on the remainder of US imports from China at some point in the near future”. Economists at Goldman Sachs concur, believing that “renewed talks are unlikely to result in the broad agreement the US had sought a few months ago, and that it is slightly more likely that the US will impose tariffs on additional imports from China. [They] assume these tariffs would be applied at a 10% rate if they were imposed”. On the flipside, some of our panelists, such as ING and Berenberg, see a potential window for a deal in Q4, as President Trump will want to support domestic economic growth heading into his 2020 re-election campaign—though further tariffs could still be applied before that. Either way, the evolution of the trade dispute in coming months will remain crucial to the prospects for Hong Kong’s economy.