Don’t panic, Hong Kong; at least not yet

Facts
Hong Kong's headline PMI stayed below for the second consecutive month in September, printing 45.9 versus 47.8 previously (long-term average: 51.7; 2008/09 bottom: 38.7). All sub-indices signaled a cooling of business activity, despite the continued growth of new orders from Mainland China. The new orders sub- index printed below 50 for the second straight month, registering 44.5 compared to 48.1 a month earlier(long-term average: 52.2; 2008/09 bottom: 30.3). In contrast, the new China business sub-index held up at 50.5 relative to August's print of 52.6 (long-term average: 52.4; 2008/09 bottom: 32.4).

Output thus contracted at its fastest pace since April 2009, sending the sub-index down to 43.7 from 46.3 previously (long-term average: 52.4; 2008/09 bottom: 33.1). Survey respondents flagged more challenging macro conditions as the key reason behind slower new business inflows.

As a result, staffing levels at companies in Hong Kong registered a slight contraction for the second month running at 47.5. The pace of decline was a touch slower than August's 47.3 however. With survey respondents attributing this to both staff resignations and slower business activity, it seems local job market conditions have yet to be dislodged by on-going global economic and financial market turbulence. This view is further supported by the increase in staffing costs for the 26th straight month to 53.4 (Aug: 54.2). That said, wage inflation eased below its long-term average of 54.3 for the first time since Nov 2010.

Overall input cost inflationary pressures however stayed above their long-term average, with the sub-index at 63.4 (Aug: 64.1; long-term average 59.6). Business raised the prices charged to consumers for the 23rd consecutive month as a result, with the prices charged sub-index reading at 53.8 (Aug: 55.2; long-term average 53.5).

Implications
While it's disconcerting to see Hong Kong's PMI dip below 50 again for the second straight month, it would have been a surprise for it to hold on above 50 given the territory's status as one of the region's most open economies. September saw Korea's PMI contract for the second month running as well, and Taiwan's for the fourth month running.

To keep things in perspective however, we're not yet in panic mode. Though the dip into contraction territory is happening a touch faster than during the 2008-2009 dip, the support offered by Mainland demand, is also higher than previously.

Market concern that the global economy is on the verge of renewed recession persists. But not all indicators suggest that a recession is inevitable. Europe's outlook is looking more worrying than a quarter earlier for sure, but recent data from the US (e.g. for the manufacturing sector and car sales, which jumped in September) suggest that a recession is not necessarily imminent. Most importantly for Asia, we still expect China to maintain positive growth for the time being, helping to support intra-regional trade. Beijing is no longer in an aggressive tightening mode, so with Mainland monetary conditions set in neutral gear for the rest of this year, Chinese output should pick back up on a sequential (q-o-q, sa) basis by 4Q11.

New order growth from China is currently insufficient to fully counterbalance the impact of weakening Western demand on Hong Kong. But as Mainland growth finds a firmer footing towards the end of this year, we expect the China counterbalance to expand, backed by sustained income growth and on-going infrastructure investment.