Hong Kong PMI expands for 21st straight month

PMI bounced back from the Lunar New Year into solid expansion territory as the March headline PMI jumped to 54.9.

According to HSBC, robust demand conditions at home and in the Mainland kept private sector activity expanding throughout Q1, supporting both output and headcount increases.

However, healthy demand is increasing businesses' willingness to pass on higher input costs to consumers, stoking the build-up of inflationary pressures in the economy. That said, headcount and wages are rising in tandem, helping to protect consumers' purchasing power from being eroded by rising living costs.

Hong Kong's private sector pace of expansion accelerated in March, as further evidence that the territory's private sector remains on track for a solid first quarter GDP growth result.

March's headline PMI picked up pace to print 54.9 versus 53.7 previously. This was the 21st straight month that Hong Kong's private sector has expanded. New order intakes from both at home and China drove this improvement, rising to 56.0 from 54.1 and to 54.8 from 51.3 respectively. The output sub-index subsequently picked up to 56.4 in March versus 54.9 in February. The acceleration in new work orders received (although slower than in February) meant that backlogs of work expanded again for the eighth consecutive month, printing 55.3 (Feb: 56.2).

As a result, headcount expanded again for the third month running to 52.2 (Feb: 52.6), keeping the employment sub-index above the 50-no-change threshold throughout the first quarter of this year. At the same time, the continued strength of final demand meant that employers could afford to keep hiking wages too, keeping the staff cost sub-index above 50 at 55.0 versus 55.3 previously. The pace of increase was slightly slower than in recent months, but remained high above its historical average (52.6).

Demand from China and at home had dipped in February, most likely as a result of distortions associated with the timing of the Lunar New Year. However this effect was only passing as expected.

Meanwhile, on the inflation front, the pass-through of spiraling input costs to output prices continued to pick up pace. Hong Kong's input and output cost sub-indices simultaneously rose in March, printing a 4-month high of 71 (Feb: 67) and 33-month high of 59.4 (Feb: 57.2) respectively. Rising raw material costs and unfavorable exchange rates fueled input cost inflation, coaxing more businesses to pass on the cost burden to consumers - which in turn sent the prices charged sub-index to a level well above its long-run average. Survey respondents attributed above-trend wage growth to "higher reward for greater company performance".

After two consecutive months of increase, the differential between the output and input cost sub-indices dipped down slightly, to -11.6 versus -9.4 earlier. Although input cost inflation is still rising, the downtrend in this measure suggests that the transmission of input-to-output price inflation pressures has yet to escalate out of control.

Hong Kong's private sector expanded solidly through 1Q11, despite the drag of Chinese New Year festivities upon China's trade activities and the gradual filtering through of Beijing's monetary tightening measures. The mix of imported mass monetary stimulus and mainland fiscal spill-will continue to feed Hong Kong's robust domestic demand throughout the rest of this year, especially with interest rates set to stay at record lows through 2011. The drag of a higher base effect will cool things a little, but solid Mainland growth and an increasingly firm economic recovery in both the US and core European economies means that Hong Kong remains more at risk of over-, not under-, heating in 2011.