In this file photo dated August 27, 2020, an employee works at the Koon Chun Sauce Factory in Hong Kong. (PHOTO / AFP)

Hong Kong’s private economy contracted for the first time this year, as the Purchasing Managers’ Index (PMI) has been at rock bottom since November. It is expected that the declining business climate and potentially intensifying price pressures may well further dampen business confidence and subsequent demand as well as services. 

According to S&P Global, the PMI fell to 49.4 in July, another drop from 50.3 last month after a consecutive five-month fall, registering its lowest point since November. 

The manufacturing sector suffered the worst from diminishing orders in July, with a moderate drop in both new orders and outputs, S&P Global points out

S&P indicated that since new orders declined this month, companies reduced their production in response. The upside is, however, businesses from overseas and the Chinese mainland manifested a continuous climb, buffering the overall grim decline in economic activity. 

READ MORE: China's manufacturing PMI ends 3-month decline in June

It’s true that the reopening of private enterprises and resumption of business have propelled a growth momentum, but the dynamic seems to be exhausted in June and July and is starting to peter out, reasoned Pang Jingyi, an economics associate director of the PMI team at S&P Global Market Intelligence.

Compounding the deteriorating business milieu is the concern over intensifying price pressures, which could strain business confidence and further compromise market demand as well as services in the coming months.

The concern over cost pressures faced by private enterprises in Hong Kong is not ungrounded. The cost of raw materials, transportation, and employee salaries have been rising simultaneously, prompting companies to raise prices, with the pressure being passed on to customers. The pace of price increase has overtaken that of the previous month, exceeding the average level of the recent year, S&P Global reported. 

READ MORE: China: PMIs show improving manufacturing, robust services

The manufacturing sector suffered the worst from diminishing orders in July, with a moderate drop in both new orders and outputs, S&P Global points out. Whereas, new orders from the Chinese mainland and abroad kept on the upward trend, benefiting from the vibrant resumption of tourism. It may lend some relief but it could be short lived, because the report cautions that suppliers this month extended their delivery period, which suggests worsening tension in the supply chain. Therefore, businesses may well be overwhelmed with backlogs and workloads.