Business activity in Hong Kong contracted for a fourth straight month in October as order volumes fell at the fastest pace on weaker global demand.

The purchasing managers' index (PMI) dropped to its lowest in more than five years.

The index fell to a seasonally adjusted 43.1 in October, its lowest level since May 2003 when the territory was hit by the SARS which shattered business and consumer confidence.

The index fell from 46.7 in September, and October was the fourth straight month the index was holding below 50, a dividing line between growth and contraction.

Depressed activity reflected fears of a prolonged global economic downturn, with new business from the mainland dropping for a fifth straight month, the PMI survey showed.

The survey compares business conditions with a month earlier, based on data from Hong Kong companies across industries including manufacturing, services, retail and construction.

Economists expect the business condition will be worsening. "This is just the beginning," said Paul Tang, senior economist at Bank of East Asia.

"The trade and manufacturing sectors are going through a very difficult time. We are also starting to see weaker consumption, starting with the property sector. If you go out to eat in restaurants, there are still plenty of people but that will change as unemployment rises," Tang said. "Tougher times are ahead," he added.

A continued fall in PMI suggests that Hong Kong may have slipped into a recession, Citigroup's analyst Joe Lo said.

He agrees that the economy is likely to worsen in the coming months, as the trend of plunging new orders would prompt more firms to close or lay off workers.

However, Lo said that Hong Kong could depend on domestic demand to avert a deep recession.

"A lower inflation suggested by firms' price cuts and the government's special fiscal measures have boosted the purchasing power of household income and may provide a moderate support to real consumption," he explained.

Deteriorating business conditions in October forced companies to cut their prices but they also benefited from sharply lower inflation as raw material prices fell, the purchasing managers' index survey of 300 private companies shows.

In October, average prices charged by Hong Kong firms fell for the first time since August 2004 and a number of firms pursued discounting strategies in a bid to boost demand, according to the survey.

Reuters contributed to the story

(HK Edition 11/04/2008 page2)