This harbinger of trade is flashing a warning signal for the global economy

Lam Yik Fei/Getty Images
  • Hong Kong’s PMI fell to the lowest level in nearly two years in June, weighed down by falling output and new orders.
  • As an economy so reliant upon trade, the PMI, like many other global and regional indicators, is providing an early warning signal for the global economy.
  • The US plans to slap tariffs on $US34 billion worth of Chinese imported goods on Friday. China has promised to retaliate with tariffs on the same amount of US imported goods.

Forget the trade war, trade tensions are already impacting Hong Kong’s trade-exposed economy.

Its private sector contracted again in May, a bearish lead indicator on what may be in store for the global economy should a fully-fledged trade war kick off.

The Nikkei-IHS Markit dipped to 47.7 in June after seasonal adjustments, the weakest result in nearly two years.

This PMI measures perceived changes in activity levels across Hong Kong’s private sector from one month to the next. Anything above 50 signals activity levels are improving while a reading below suggests they’re deteriorating.

The distance away from 50 indicates how quickly activity levels are expanding or contracting.

So at 47.7, activity levels not only deteriorated in June, they did so at a fastest pace since the middle of 2016.

Hardly a great sign for global trade, nor the strength of demand coming from China.

IHS Markit

Like the headline PMI, the internals of the June report were weak across the board.

“Weighing on the headline PMI were contractions in both output and new orders,” IHS Markit said. “Survey data indicated that production and new business inflows continued to decrease at a marked rate, albeit slightly slower than May”.

Of note, respondents reported softer client demand, especially from China.

“Sales to China fell for a second straight month, though at a slower rate than in May,” the group said.

“According to anecdotal evidence, lower sales were linked to high competition, poor weather and a weaker economic environment.

“There were mentions that rising China-US trade frictions also restrained new orders.”

With both output and new orders falling, order backlogs decreased while staffing levels were cut.

Like so many other trade indicators pointing to a slowdown in global trade flows, firms also noted that “constraints remained evident during June, with delivery times of inputs continuing to lengthen”.

Bernard Aw, Principal Economist at IHS Markit, said this, along with higher commodity prices, contributed to purchase costs increasing at the fastest pace since 2011.

“Purchase cost inflation lifted to the highest in nearly seven years, with increased prices for paper, plastics and copper cited as sources of increased costs,” he said.

“When firms want to pass these increased costs onto clients, weak demand conditions restricted the extent to which they could raise selling prices.”

So output, employment and new orders fell, while inflationary pressures intensified.

As Aw explains, it’s not usually a scenario that bodes well for the Hong Kong economy.

“The deterioration of private sector activity in Hong Kong extended into the end of the second quarter, as PMI surveys suggested the economy suffered its first quarterly decline since the start of 2017,” he said.

“The PMI exhibits a strong correlation with Hong Kong’s GDP, with a two-month lead, suggesting that recent poor performances will be keenly felt during the third quarter.”

Beyond what the report is saying about the Hong Kong economy, it also suggests that, like so many other indicators recently, that global trade is starting to slow.

Hong Kong is, after all, the world’s fifth largest port by container throughput.

China manufacturing PMIs reported falling export orders in June, as did the separate ASEAN PMI, also produced by IHS Markit.

And while the Singapore PMI — another trade-exposed economy in Asia — was significantly stronger than Hong Kong, casting doubt as to whether trade is slowing as much as other indicators would suggest, IHS noted the improvement was likely driven by domestic factors, rather than strengthening demand abroad.

Combined with other indicators such as air freight volumes and trade data from South Korea, often regarded as being harbingers for what’s occurring globally, it all points to a weakening in global trade.

And that’s before a full-blown trade war between the United States and China had truly begun. One can only hypothesise what may happen next as both sides ready to lift tariff’s on each others imports on Friday.

Given the early warning signs from the Hong Kong PMI and other indicators, one suspects it won’t be good news.

NOW READ: ‘THIS COULD END VERY BADLY’: Saxo Bank warns trade tensions are likely to get significantly worse

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