The expansion of Hong Kong's private sector economy weakened further in July as growth in new orders and output eased amid a slowing economic recovery in the US and debt woes in Europe, according to the latest survey of purchasing managers by HSBC.

The HSBC Hong Kong Purchasing Managers Index dropped to 51.3 in July from 52.6 in June. A reading above 50 indicates expansion.

The July numbers released Wednesday suggest the pace of expansion slowed for a third consecutive month to the weakest pace since August 2009.

"Hong Kong's rate of expansion is normalizing following a sharp recovery in the early part of the year. The easing of output and new order growth is an expected part of this process," said Mark McCombe, chief executive of HSBC Hong Kong.

Input costs rose markedly during the month due to higher raw material costs and unfavorable exchange rates. In turn, purchasing activity fell as companies responded to the weaker growth in new business, which slowed for a fourth successive month, suggesting concerns over the stability of the recovery has dampened demand.

New orders received from companies on the mainland also posted a weaker rise to the lowest level in 13 months.

The latest increase in overall new business nevertheless supported further expansion in output during the month. Growth has now been sustained since July 2009.

McCombe said domestic demand will be a key driver for the economy.

"The resilience of employment conditions underlies our strong outlook for domestic demand as a key growth driver for the rest of 2010."

Growth in employment in Hong Kong remained moderate. The pace at which employers have been adding workers has been largely flat in recent months despite the easing in output growth, HSBC noted.

"It suggests that Hong Kong's economic growth has peaked out after recovering from the recession," said K.C. Law, chief economist and strategist at Bank of Communications.

Law expects lackluster recovery in Europe and the US and the ongoing shrinking of international business orders will continue to drag down the city's exports and economic growth in the next few months.

"It will not necessarily be a recession but the economy will start experiencing contraction. The city's stock and property prices will also encounter pressure next year, when hot money is expected to leave," Law added.

The HSBC Hong Kong PMI is derived from indexes measuring changes in different aspects of the private sector economy including output, new orders, employment, suppliers' delivery times and stocks of goods purchased.

China Daily

(HK Edition 08/05/2010 page3)