S&P Global reports that Hong Kong's seasonally adjusted Purchasing Managers' Index (PMI) fell to 51 in July from 52 in the previous month. Remaining above the 50 no-change threshold, the data indicates the city's business environment has improved for a third consecutive month, though the pace of growth remains moderate.

The slight decline in the PMI partly reflects a slowdown in order growth for Hong Kong's private sector, with expansion rates falling well below levels seen before the outbreak of the Middle East conflict. Respondents noted that while efforts to boost sales through enhanced promotional activities, strengthened customer confidence, and competitive pricing strategies were implemented, the local economic slowdown has placed pressure on overall order growth.

Demand from the Chinese mainland market expanded at a similar pace to June, remaining relatively robust. However, new export business remained unchanged month-on-month in July, following three months of growth. Despite this, overall orders continued to grow, supporting businesses in expanding operations. Production rose at its fastest rate since March.

Although total new orders grew for three consecutive months, the pace of expansion slowed compared to June. Meanwhile, both input costs and output prices rose at a more moderate pace, easing inflationary pressures. However, sluggish demand growth led businesses to reduce purchasing, cut inventories, and even lay off staff, with workforce reductions reaching their most significant level since August 2023.

Business sentiment for the next 12 months has become more cautious compared to the previous month, with companies expressing clear concerns about the local economic outlook. Purchasing activity declined at the most pronounced rate since September last year, with respondents attributing this primarily to slowing demand, prompting tighter procurement strategies. Consequently, firms worked to reduce inventory levels, leading to a drop in stockpiles.

Supplier delivery times have now lengthened for three consecutive months, though the delays were less severe than in June. The latest survey data also shows that inflationary pressures in Hong Kong's private sector continue to ease. Underlying data indicates that purchase prices rose faster than in June, while salary costs increased only marginally, marking the smallest rise in five months.

Enterprises raised prices at a slower pace in July compared to the previous month, aligning with overall cost trends. The increase was the smallest in four months and remained modest, with several companies cutting prices to stimulate sales. When assessing the business outlook for the coming year, firms grew more pessimistic in July, with many citing concerns about the local economy and high inflation as reasons for a bearish outlook.

Usamah Bhatti, Economist at S&P Global Market Intelligence, commented that Hong Kong's business environment continued to improve in early 2026, with output growth reaching its fastest pace since March. However, the expansion of overall new orders slowed, partly reflecting the ongoing impact of the Middle East conflict on global trade, which has stalled export sales. The narrowing of input costs, employee costs, and selling prices suggests a encouraging sign of cooling inflation at the start of the third quarter. Nevertheless, the rise in purchase prices remains more pronounced than in June, a development that cannot be overlooked.