Hong Kong: PMI sinks to near three-year low in May
The Nikkei Hong Kong Purchasing Managers’ Index (PMI), released by IHS Markit, fell from 48.4 in April to 46.9 in May, the lowest reading since June 2016. The index thus fell further below the 50-point threshold that separates expansion from contraction in the private sector, where it has been since April 2018.
The further deterioration of operating conditions in May came amid a significant flare-up of tensions in the U.S-China trade war, as President Trump raised existing tariff rates on Chinese imports from 10% to 25% on 10 May and subsequent press reports suggested a breakdown of bilateral talks. This weighed heavily on demand conditions in the month.
New orders notably contracted at a sharper rate than in April, led by a steep drop in orders from mainland China—which, according to anecdotal evidence, was largely due to the increased tensions with the U.S. Concurrently, output continued to contract, and backlogs of work fell as well.
Against this depressed demand backdrop, supply-side activity also took a beating, with purchasing activity slumping again while firms continued to tap into existing inventories. On the plus side, this led to supplier delivery times improving for the third straight month. On the price front, input costs rose marginally—only due to wage increases as the price of raw materials fell for a second month—as did output charges. Finally, business confidence sunk further into pessimism and fell to a six-month low, again mired by the prospects of an escalating trade conflict.
The outlook is likely to continue worsening in coming months, as the U.S. administration is considering applying tariffs on all currently untaxed Chinese goods. The office of the US Trade Representative has already begun drafting the list of targeted goods, and the new levies could be applied as early as the beginning of July. That said, the next G20 summit, scheduled for 29-29 June in Osaka, could provide a crucial opportunity for Presidents Xi and Trump to rekindle dialogue and avoid a further escalation of hostilities.