Firms also had to grapple with higher raw material prices which may have led to some layoffs.
Despite higher levels of business activity thanks to robust Chinese private sector demand, PMI dipped 51.1 in January as lower employment and reduced inventories weighed heavily on the headline figure, according to IHS Markit.
The Nikkei Hong Kong PMI is a leading indicator of the manufacturing sector’s economic health as it gauges business conditions in the private sector.
Data from January showed that growth in backlogs was at a six-month high and employment also fell as firms started implementing cost cutting measures. Operating capacity was similarly stretched to its limits due to higher levels of order bookings.
Firms also had to contend with rising inflation levels as purchase costs rose at one of the fastest rates in the past six years.
“An area of concern is higher costs. Input price inflation remained strong and was driven mostly by increased raw material prices. There was survey evidence of companies limiting staff numbers as part of efforts to save costs. Whilst firms were able to raise their selling prices, the rate of increase remained below that of cost inflation, indicating an ongoing squeeze on corporates’ profit margins,” said IHS Markit Principal Economist Bernard Aw.
However, overall sentiment remains upbeat as business confidence hits almost a three-and-a-half year high thanks to rising e-commerce, new product launches and higher sales forecasts.
Despite the decline, the latest PMI figures remains consistent with 4% annual GDP growth and survey indicators suggest that economic activity will likely pick up in the months ahead.
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