Hong Kong business activity drops most in 3 years on protests impact

[HONG KONG] Activity in Hong Kong's private sector fell by its biggest margin in three years in October, a private survey showed on Wednesday, offering a first glimpse of the impact pro-democracy protests are having on the economy and signalling a further slowdown.

The monthly Purchasing Managers' index (PMI) in Hong Kong's private sector compiled by HSBC/Markit fell to 47.7 in October - its strongest pace of deterioration in operating conditions since September 2011 - from 49.8 a month ago.

Sub-indices measuring new orders and output led the decline with a number of companies surveyed attributing the drop to recent political protests that have blocked key roads and hurt business activity for more than a month. "The slowdown in economic activity in Hong Kong deepened in October as orders and output fell at an accelerated pace," John Zhu, HSBC's economist in Asia, said.

A reading above 50 in the business survey indicates an expansion in activity while one below that threshold points to a contraction.

The dismal data is the first set of figures that factor in the impact of pro-democracy protests that have rocked the former British colony.

It is a harbinger for a weak set of retail sales figures for October due to be released next month and will weigh on a slowing economy in the second half of 2014, analysts said.

The numbers also add pressure on government officials to take remedial action as the economy suffers from the protracted street protests even though financial markets and central bank officials have downplayed its impact.

For more than a month, some key roads leading into Hong Kong's most economically and politically important districts have been barricaded with wood and steel by thousands of protesters.

Retail sales, which have faced the brunt of the impact, are in for more pain. The sector made up nearly a quarter of GDP in 2013, up from 13.6 per cent in 2002, according to Deutsche Bank. "If we can achieve flat growth this year, we should all be clapping our hands. I will be very happy if we can still achieve zero growth," Caroline Mak, chairwoman from the Hong Kong Retail Management Association, told a conference call on Monday. "In view of the uncertain factors, I'm pessimistic over the retail sector." Cosmetics retailer Sa Sa International Holdings Ltd had early last month posted a drop in retail sales during China's "Golden Week" holiday between Oct 1 and 7, as civil unrest in its home market hit shopping activity.

Before the pro-democracy protests kicked off in September, the economy was already slowing thanks to a drop in consumption driven by a decline in tourist spending.

Official forecasts for real GDP growth is between 2-3 per cent for the full year, compared with 2.9 per cent in 2013 though some banks such as Goldman Sachs have already cut their growth targets for 2014 anticipating a weak final quarter.

In another sign of how the economy is hurting, private sector firms reduced staffing levels for the seventh consecutive month in October, and the rate of job losses was the quickest in 16 months.

The PMI survey polls around 300 companies that represent the structure of the Hong Kong economy, including manufacturing, services, retail and construction.

REUTERS