Hong Kong heads towards recession as August PMI sinks to 11-year low

Cutbacks in purchasing activity was the worst recorded since July 1998.

Private sector health’s downturn accelerated in August as the Purchasing Managers Index (PMI) sank to 40.8, the steepest decline since the height of the global financial crisis, IHS Markit Research reported.

This is the lowest business confidence recorded in over seven years, according to the report. The PMI has now posted below the 50 no-change mark for 17 months in succession.

Also read: PMI sinks to decade-low 43.8 in July

In particular, the extent of the cutback in purchasing activity during August was the greatest seen since the survey started in July 1998. 

Bernard Aw, principal economist of IHS Markit Research, said that the only other time that the PMI survey has recorded a steeper downturn were during the SARS epidemic in 2003 and the global financial crisis in 2008-2009.

"The latest PMI data reveal a Hong Kong economy flirting with recession in the third quarter as business activity is increasingly aggravated by protest-related paralysis, " said Bernard Aw, principal economist of IHS Markit Research.

“The survey is now broadly indicative of the economy contracting at an annual rate of around 4% to 4.5%,” he added.

Also read: GDP growth may moderate to 2.2% in 2019 amidst cautious business sentiment: analyst

New business fell furthest in August, with inflows of new work recording its steepest decline since February 2009, dragged down by a series-record decline in orders from mainland China. Additionally, nearly half of survey respondents reported reduced Chinese demand, citing the ongoing trade dispute, a sharp depreciation in the renminbi and the mass protests as reasons.

The report also noted that firms exercised greater caution towards inventory management as output reduced further. This reportedly led to a record depletion in input inventories.

This rapid deterioration in new sales resulted in the deepest contraction in business activity since the end of 2008, according to IHS Markit. Meanwhile, growing pessimism amongst firms was indicated by the Future Output Index falling to its lowest level since data was first collected in April 2012.

On the other hand, deflationary pressures persisted during the period, with the overall cost of burdens declining marginally for the second straight month.

Also read: Hong Kong inflation remains unchanged at 3.3% in July

“This helped provide room for firms to reduce their selling prices at the sharpest rate since the start of 2016. Panellists signalled this reflected efforts to clear inventory and boost sales amid a worsening business environment,” the report read.

“The executive authorities of the Hong Kong SAR recently unveiled an economic stimulus plan to support flagging growth momentum, but any further economic weakness will mean policymakers are likely to consider larger stimulus measures," noted Aw.

As a result of the current business situation, one-third of panel members expect lower output over the next 12 months, expanding from only a quarter recorded last month, the report added.

The Nikkei Hong Kong PMI is a leading indicator of economic health that gauges business conditions in the private sector. PMI readings below 50 represent an economic contraction.