Vietnam’s Purchasing Managers’ Index (PMI) posted 49.7 in September, back below the 50.0 no-change mark following a reading of 50.5 in August, S&P Global reported on October 2.

The Index thereby signaled a deterioration in business conditions for Vietnamese manufacturers, albeit one that was only marginal, according to the report.

The report shows that after improving in August, overall business conditions in Vietnam’s manufacturing sector declined marginally in September. Underlying data pointed to a strengthening demand environment and growing business confidence, but also a degree of spare capacity in the sector that led to reductions in output and employment.

Inflation gathered pace, with both input costs and output prices rising more quickly at the end of the third quarter.

The most positive aspect of the latest survey was a second successive monthly increase in new orders, with the rate of expansion broadly in line with that seen in the previous survey period. A number of respondents signaled that strength in new export orders, particularly from other Asian economies, had helped boost total new business. The rate of expansion in new sales from abroad was solid and more pronounced than that seen in August.

Despite the continued pick-up in demand, manufacturers signaled that new order receipts remained relatively modest, leading to a scaling back of production. Output was down slightly following August’s rise, with production now having fallen in six of the past seven months. The overall contraction in output was centered on intermediate goods producers, with the consumer and investment goods categories recording expansions.

A further reduction in backlogs of work in September signaled that manufacturers maintained sufficient capacity to cope with current workloads. As such, there remained a reluctance to hire additional staff. Employment decreased for the seventh month running. Though modest, the rate of job cuts was the most marked since June.

While manufacturers lowered their staffing levels, they expanded input buying. Purchasing was up for the second month running in response to growth in new orders and plans to increase output in the months to come.

These expansion plans were also evident in data on business confidence, which strengthened for the fourth consecutive month and was the highest since February. Firms expect new orders to improve further, thereby leading to output growth. Around 45 per cent of respondents predicted output to rise over the coming year, against 7 per cent that were pessimistic.

Though demand for inputs strengthened again in September, suppliers continued to speed up deliveries. Lead times shortened for the ninth consecutive month, albeit to the least extent since April.

Stocks of both purchases and finished goods declined at the end of the third quarter, in both cases for the first time in three months. Stocks of finished goods were used to help meet new export orders.

The rate of input cost inflation quickened, reaching a seven-month high. Rising fuel prices reportedly added to transportation costs, while increases in prices for oil and imported raw materials were also mentioned.

In turn, output prices rose for the second month running, albeit at a modest pace.

“The picture was mixed in Vietnam’s manufacturing sector during September,” said Mr. Andrew Harker, Economics Director at S&P Global Market Intelligence. “On a positive note, firms continued to see demand pick up, with a particularly encouraging rise in new orders signaled. This fed through to greater confidence in the year-ahead outlook. On the other hand, there is clearly still some excess capacity in the sector, which meant that firms continued to lower employment and also scaled back output slightly, opting to use the inventories that had been building up in recent months to help meet new orders.”

“The sector is therefore at something of a crossroads. Should demand continue to pick up, this should feed through to growth across the sector. If the recovery in new orders loses steam, however, firms will remain reluctant to expand capacity too quickly.”