SME business confidence in Hong Kong returns strong in Q3 amid easing pandemic restrictions

Hong-Kong-SME-HKPC-Standard-Chartered-Index

Hong Kong – With the pandemic situation in Hong Kong now gradually easing up to open to the local and global economy, small and medium enterprises (SMEs) in Hong Kong are also slowly opening up, with business confidence rates seeing a steadfast growth among the local SME sector during the third quarter, new data from the Hong Kong Productivity Council (HKPC) shows.

According to their latest index alongside Standard Chartered Hong Kong, the SME Overall Index has risen for three consecutive quarters, this time by 4.4 to 46.6, hitting a three-year high since Q3 of 2018.

All five component sub-indices stipulated in the index also rose in Q3, among which the ‘Global Economy’ sub-index recorded the most significant surge again, from 43.6 to 52.8 which made an impressive leap from the low of 7.9 in the same period last year. Together with the ‘Recruitment Sentiment’ sub-index which rose to 50.9, these are the first two sub-indices to surpass the 50 neutral mark in the past two years. Eightof the 11 surveyed industries have recorded two-year highs in their industry indices. 

The sub-indices of ‘Information and Communications’, ‘Real Estate’, and ‘Social and Personal Services’ are the best performing industries, with their respective indices all over 50.

On investment sentiment in the coming quarter, most SMEs are planning to spend more on ‘Information Technology’ and ‘Product & Marketing Promotion’. While 24% of SMEs plan to increase investment in ‘Information Technology’, 20% of local SMEs would like to boost investment in ‘Product & Marketing Promotion’ – both are one-year highs. Meanwhile, 63% of SMEs surveyed expected an upcoming increase of ‘Raw Material Cost’, which is 5% higher than the previous quarter.

For Edmond Lai, chief digital officer at HKPC, the results of the index reflects the stableness of the pandemic situation in Hong Kong during the survey period, and that the SME sector is bound to its ‘steady U-shape rebound with the outlooks of ‘Global Economy’ and ‘Recruitment Sentiment’ being positive’.

He also noted that the survey showed that SMEs are ‘flexing their muscles’ to pick up their business as fast as possible by increasing investment and expanding staff size.

Meanwhile, Kelvin Lau, senior economist for Greater China for global research at Standard Chartered Bank Hong Kong, commented that the latest SME Index readings confirm that Hong Kong’s business conditions have not only further improved over the past quarter, but that such positive momentum is also likely to carry over to the start of second half 2021, boding well for more economic recovery ahead. 

He also added that the are seeing confirmation as well of such recovery being broad-based, with all five component sub-indices and eight of the eleven industry sub-indices posting quarter-over-quarter increases. All this, however, is still not enough to push the overall SME Index back above the 50 neutral mark for now, meaning that SMEs are generally still operating below normal levels.

“Looking at the breakdown, the improvement in ‘Global Economy’ sub-index remains the biggest driver of positive sentiment this time, while ‘Recruitment Sentiment’ sub-index also returned above 50 for the first time in two years, boding well for Hong Kong’s unemployment rate to extend its recent nascent downtrend. That said, improving global prospects have not translated into much better confidence among manufacturers, exporters and financial services providers this time; rather, we see prior underperformers such as retailers playing further catchup – probably supported by the continued unwinding of social distancing measures since the first quarter,” Lau explained.

He added, “Our latest survey results also reflect still-high cost pressures, especially those for raw materials; that has in turn pushed prices higher for finished goods and services, confirming that some pass-through of higher costs onto buyers is indeed happening.”

In addition, the survey also explored SME perspectives and planning in response to the economic recovery in 2021. Around 7% of SMEs surveyed said their business fared better than before the pandemic, while 31% of them claimed to be close to returning to the pre-pandemic levels. The business performances of ‘Information and Communications’, ‘Real Estate’ and ‘Financing and Insurance’ industries are the most satisfactory amid the pandemic, with ‘Accommodation and Food Services’ being the most affected – 81% SMEs surveyed reported a setback in business. The most popular actions taken proactively by SMEs to achieve business rebound are ‘Product/Service Improvement’, ‘Market Promotion’, ‘Online Expansion’, ‘Productivity Enhancement’ and ‘Use of Digital Technology’.

Furthermore, the survey found that SMEs are placing high hopes on ‘Global Economic Recovery’, ‘Re-opening of Cross-Boundary Travel with the Mainland’ and ‘Relaxation of Social Distancing Measures; to fully grasp the opportunities from market recovery. Yet they also saw the constraints of a severe worldwide epidemic situation and geopolitical tensions, with 37.3% of SMEs surveyed indicating their intentions to raise prices to cope with inflation and offset cost pressure.

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