The Fifth Wave of Epidemic Triggered a Record Drop of 12.4
and a Setback of SME’s Overall Business Confidence across Industries
(Hong Kong, 26 April 2022) The Hong Kong Productivity Council (“HKPC”) today announced the “Standard Chartered Hong Kong SME Leading Business Index” (“Standard Chartered SME Index”) for the second quarter of 2022. The Overall Index dropped 12.4 from a well-performed previous quarter (from 48.1 to 35.7) – the strongest downtrend ever – showing a setback of overall business confidence of local SMEs across industries amid the fifth wave of the COVID-19 pandemic.
All the five component sub-indices* fell below the 50 neutral mark. “Global Economy” recorded the most significant decline (down 20.4 to 23.8) and became the lowest sub-index of this quarter. “Recruitment Sentiment”, the highest sub-index of this quarter, also recorded a drop of 5.9, down from 53.4 in the previous quarter to 47.5.
All industry indices declined. Of the three major industry indices, “Manufacturing” fell by 11.3 quarter-on-quarter to 33.6, “Import / Export Trade & Wholesale” dropped 9.6 to 35.9, and “Retail” suffered the biggest decline of 14.8 to 31.2. Hit hard by the fifth wave of epidemic in Hong Kong, the “Business Condition” sub-index of the “Retail” industry plunged the most by 28.4, from a high of last quarter’s 48.0 to 19.6.
Raw material costs remained at high levels. 74% of SMEs expected raw material costs to rise in the coming quarter, the seventh consecutive quarterly increase. Although most SMEs (86%) expected staff salary to stay unchanged or even decline in the coming quarter; 74% of SMEs expected product/service price to remain the same or fall in the coming quarter. For the investment outlook, 18% of SMEs expected a decrease on overall investment in the coming quarter (only 9% previously). 43% of SMEs said they would reduce investment in “Inventory”, and 38% said they would reduce investment in “Offline Marketing Promotion”. Nonetheless, only 23% and 25% of SMEs indicated that they would cut investment in “Information Technology (IT) (Related to e-commerce)” and “R&D (Research & Development)”, respectively.
The planning and actions of Hong Kong SMEs on the fifth wave of the epidemic were explored in the featured topic of this quarter’s survey conducted in March 2022, which was considered the peak of the fifth wave. 46% of the SMEs responded that they had temporarily suspended their businesses or expected their businesses could only last for 6 months at most, should the tightened anti-epidemic measures continue. 70% of SMEs said they needed to cut down on costs, mainly by downsizing business scale, changing suppliers and leveraging technology.
76% of SMEs indicated a decrease in income under the fifth wave of epidemic. The most affected industries were “Social and Personal Services”, “Retail” and “Accommodation and Food Services”. To overcome the challenges, more than half of the SMEs from “Accommodation and Food Services” (68%) and “Social and Personal Services” (51%) said they would apply for government funding, while SMEs from the “Retail” sector would mainly rely on offering price discount (46% of SMEs) or expect to take advantage of the Consumption Voucher Scheme (34% of SMEs). Among the three industries, more than 60% of the surveyed SMEs from “Retail” and “Accommodation and Food Services” believed that their businesses could benefit from the consumption vouchers, while only 20% of SMEs from “Social and Personal Services” believed it to be helpful.
Mr Edmond Lai, Chief Digital Officer of HKPC, said, “During the fieldwork period of this quarter’s survey, many economic activities in Hong Kong were almost at a standstill due to the fifth wave of epidemic, leading to the expected downturn in the index results as the market was pessimistic. If the anti-epidemic measures remain tight, nearly half of the surveyed SMEs said that they had temporarily closed or may close their businesses within six months, which was a concerning situation. However, we can expect SMEs to regain business confidence following the timely announcement of the HKSAR Government in late March on the roadmap of easing the social distancing measures, and the new phase of the Consumption Voucher Scheme in early April, as long as the epidemic situation stabilises or improves. It is hopeful that the businesses of SMEs will recover gradually.”
Lai continued, “In terms of the investment outlook in the coming quarter, nearly 20% of SMEs expected reduction in overall investment, which had doubled from the previous quarter, yet over 70% of them said they would not cut down long-term investments such as IT and R&D even under the strain of the fifth wave. HKPC strongly believes that IT and R&D are crucial to enterprises in the post-epidemic New Normal led by digitalisation and technology. To help Hong Kong SMEs tide over the difficulties, we offer 50% price concession on R&D and consultancy services, testing services and HKPC venue charges under the epidemic to bolster the adaptability of Hong Kong SMEs to the New Normal and enhance their productivity through IT or other innovative technologies, so as to transform challenges into opportunities.”
Mr Kelvin Lau, Senior Economist, Greater China, Global Research, Standard Chartered Bank (Hong Kong) Limited, said, “We knew the month of March – during which our latest survey was conducted – was full of challenges for our SMEs respondents. The city was battling its worst COVID outbreak throughout the survey period, during which other headwinds such as global inflation and the Ukraine crisis also intensified. The result was the biggest quarter-over-quarter drop (-12.4) in our Overall Index since it began in 2012; this record drop was also very broad-based, with all five of the index sub-components and all eleven of our industry sub-indices contributing to the setback. Weaker demand has also made rising final prices more difficult for SMEs, meaning greater margin pressure as cost pressures stay high. All that said, there are also silver linings. For one, despite the steep index drop and the confluence of headwinds, the Overall Index remained above levels in early 2020 and early 2021 when prior COVID waves peaked. Moreover, the deterioration in hiring and investment sentiment (proxies for long-term business confidence) appeared less severe than those for sales and profit margins (gauges for short-term business performance), boding well for an eventual H2-2022 recovery if Hong Kong is to cautiously exit its COVID restrictions as planned.”
Conducted in March 2022, the Standard Chartered SME Index survey successfully interviewed 812 local SMEs. The report will be available for download from HKPC website: https://u.hkpc.org/scbi-en.
*The five Sub-categories are “Recruitment Sentiment”, “Investment Sentiment”, “Business Condition”, “Profit Margin” and “Global Economy”.