Hong Kong: PMI tumbles to over decade-low in July amid mass protests and trade tensions
The Nikkei Hong Kong Purchasing Managers’ Index (PMI), released by IHS Markit, fell from 47.9 in June to 43.8 in July, marking the lowest reading since March 2009 and the 16th consecutive month of deterioration in private sector conditions.
The reading in the month was heavily weighed by the recent large-scale political demonstrations against an extradition bill—which has since been shelved—and the government, as well as the persistent shadow of the U.S.-China trade war. What’s more, though tensions abated somewhat in July after Presidents Xi and Trump met on 29 June and rekindled trade talks, on 1 August Trump dramatically escalated the dispute—which now appears to be a full-blown economic war with no apparent prospects for a near-term truce—by announcing he would apply 10% tariffs on more than USD 300 billion of currently unaffected Chinese goods. Thus, the situation is likely to deteriorate further in coming months.
Against this bleak backdrop, demand conditions continued to worsen at an accelerated pace. New orders declined at the steepest rate in over a decade, weighed notably by feeble demand from the mainland, as did output. This consequently led backlogs of work to continue shrinking, while firms further reduced their purchasing activity and tapped into existing input stocks, which fell at the fastest rate in 16 years. On the price front, input purchase costs fell markedly, and companies reduced their selling prices in a bid to stimulate demand. Lastly, business confidence fell to the lowest level since January 2016, due mainly to the trade war and recent protests in Hong Kong.
Overall, researchers at Nomura remain particularly pessimistic regarding the outlook for trade, and see the new U.S. tariffs as likely to be ramped-up further in the months ahead, which would certainly deal another blow to economic momentum in Hong Kong. They said:
“[We] continue to expect the tariff rate on the fourth tranche to eventually move up to 25%, likely by the end of the year. With little progress towards achieving a broad trade agreement, we believe Trump has an incentive to implement this final round of tariffs earlier in order to mitigate the economic impact leading up to the November 2020 election, but China’s response to the latest US escalation will be important. The US and China were scheduled to resume trade negotiations in DC in September. Despite Trump’s comment that trade talks are continuing, [the 1 August] announcement may result in those talks being canceled and raise the possibility of a more overtly disruptive break in negotiations that remain fragile.”