Private-sector output in Hong Kong contracted for the second consecutive month in June owing to the double whammy of weakening economies in Europe and on the mainland. The headline HSBC Hong Kong purchasing managers' index (PMI), which gauges business conditions across the city's private sector, was 49.8 last month and 49.4 in May, according to a report HSBC commissioned from Markit, a financial information service provider. The survey is based on data compiled from monthly replies to questionnaires sent to purchasing executives in more than 300 companies. A figure below 50 indicates conditions are contracting. The index may have slightly improved from the month before, but firms have generally noted weaker client demand in the face of the lukewarm global economy. About 13 per cent of surveyed firms reported a reduction in activity since May. The survey also recorded a solid reduction in purchases, with the rate of input price inflation slowing to its lowest level in three years. This has helped to ease inflation in general and relieve some of the cost burden on manufacturers. 'We have yet to see the light at the end of the tunnel, as the slide in product prices was even steeper than that in raw materials and fuel,' said Irons Sze, president of the Chinese Manufacturers' Association of Hong Kong. The fact that profit margins of most manufacturers are being squeezed will likely be revealed in the mid-year financial statements of Hong Kong-listed companies. Capital investment will be stalled for some time in light of the worsening margins, which will continue to weigh on the PMI, Sze said. Machinery is only operating at 90 per cent of capacity at most factories owned by Hong Kong businesses on the mainland, while some are operating at as low as 70 per cent, he said. Incoming new orders increased marginally last month owing to new product launches, the HSBC report said. However, new business from the mainland fell for the third month and dipped at the sharpest rate since November, highlighting weakening economic growth. 'The simultaneous weakening of European and mainland demand continues to hamper Hong Kong's private business sector growth,' said Donna Kwok, an economist at HSBC. 'Despite that, Hong Kong's private business activities continue to hold up significantly better than during the last downturn in 2008-2009.' The fall-off in output contributed to job losses in the city's private sector for the second consecutive month in June. 'While the job market is showing initial signs of strain, wage growth remains positive, which suggests that the impact of external headwinds on wage earners remains contained,' Kwok said. 49.8 Hong Kong PMI for June, a slight improvement from 49.4 in May but still showing contraction in activity, as it's below 50
