The seasonally adjusted Purchasing Managers' Index (PMI) slipped to 52.5 in July from 53.4 in June. A reading above 50 indicates the economy is still expanding.
"Rising purchase costs, inflation and interest rate hikes are major concerns for the Hong Kong economy in the second half of 2004," Sam Tseng, an official at the Chartered Institute of Purchasing and Supply Hong Kong, said in a statement.
The survey compared business conditions in July with those a month earlier, based on data from 300 Hong Kong companies in manufacturing, services, retail and construction.
The government has forecast the economy will expand by six percent in 2004 from 2003, buoyed by strong export growth and a boom in tourism after Beijing relaxed travel restrictions to the territory last year.
But many analysts expect economic growth to slow in the second half, from 6.8 percent in the first quarter, as China's economy cools following Beijing's measures to curb investment in sectors like automobiles and steel.
Hong Kong's jobless rate has fallen from a record high of 8.7 percent last year to 6.9 percent, but remains one of the highest in Asia.
Total input costs increased for the eleventh month, with sharply higher prices for raw materials such as oil and steel.