Business optimism in Hong Kong rose sharply in the first quarter of 2014 from the previous quarter, according to the latest Grant Thornton International Business Report (IBR). In Hong Kong, 48% of businesses had a positive 12-month outlook for the city’s economy, compared with 8% in the fourth quarter of 2013.
Business confidence in Hong Kong is at one of its highest since the first quarter of 2011, as revenue expectations jump from 39% to 72% and export levels record a two-fold rise to 32%, a strong sign of an economic upswing in Hong Kong. Expectations on selling prices also saw a slight increase from 43% to 48% over the last quarter.
Business confidence in Hong Kong last year had been at an all-time low since the second quarter of 2012 amid prolonged unemployment and rising inflation, among other factors.
The increased optimism of Hong Kong businesses in the first quarter of 2014 versus the fourth quarter of 2013 is consistent with an improvement in business confidence across the Asia Pacific region (37% vs. 26%) and globally (44% vs. 27%), as suggested in the IBR findings.
The global rise was largely driven by significant improvements in business optimism in the world's three largest economies: the U.S. (66% vs. 36%); China, (38% vs. 22%); and Japan, where its optimism of 17% might appear modest but is the highest since 2010 and about triple the country’s business optimism of 6% in the previous quarter.
“As an international financial hub, Hong Kong has always been heavily influenced by external economies. The surge in optimism reflects the stabilising of China’s economy and considerable economic expansions in the U.S. and Europe,” said Daniel Lin, managing partner at Grant Thornton Hong Kong.
The IBR also shows that companies in Hong Kong are looking at investing more in their businesses this quarter. 30% of those surveyed said they expect to spend on research and development in the next 12 months, up from 14% last quarter, while 48% of the respondents (up from last quarter’s 27%) also said that they expect to see an increased investment in plant and machinery this year. This signals a rise in the number of dynamic businesses looking to grow and to expand their operations, spurred on by the promising outlook of the economy.
Employment market rosy yet less pay raises
Along with the broadly optimistic business sentiment in Hong Kong, employment expectations by Hong Kong businesses have also climbed from 27% to 48% in the previous quarter, indicating that companies are much more likely to expand their operations and increase their headcounts this year.
Even so, 40% of companies surveyed acknowledged a shortage in skilled labour in the local workforce, up from 34% in the previous quarter as the need to fill highly specialised roles becomes more pressing with the growth of businesses. These businesses also indicated less willingness to pay more in the coming year, with 74% saying they would offer employees a pay rise, down from 83% in the previous quarter.
“The drop in the number of businesses willing to give pay raises this quarter is marginal and should not have too much impact on the employment market. It is important to note that at the end of the day, three-quarters of businesses here are still willing to pay for the right talent to aid their growth plans and that’s significant compared with the rest of the region ,” said Daniel Lin.
Increasing costs may be a challenge as economy strengthens
While businesses are generally optimistic regarding revenues and exports, the survey also indicated that increasing operating costs in the region might be a key challenge as expectations regarding profitability fell to 24% from 41% in the previous quarter. Of those surveyed, 26% (up from 18%) also said that currency exchange rates may have an impact on their businesses as well.
“On one hand, the business optimism in Hong Kong is rising. On the other, there is a growing concern over the price of doing business here, due to the increasing costs of materials, resources, property rates, currency fluctuations and a rise in the minimum wage in the city,” Daniel Lin commented.
“Businesses will need to align these two trends over the next few months, while at the same time work creatively and do more with less in order to successfully navigate profitability hurdles and adapt rapidly to an increasingly fast-paced and transient economy. It is also important for business to understand not just their core competencies but those of their competitors as well, in order to identify opportunities and to unlock the potential for a long term, sustainable growth.”