Vietnam's manufacturing index slows for third month

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Vietnam's manufacturing index hit 48.5 in July from 46.4 the previous month, still at the sub-50 level, signaling a third successive monthly contraction in the sector, according to a HSBC report released August 1.

Although falling at a slower rates compared to June, output and new orders continued to slow last month, causing the country's Purchasing Managers' Index (PMI), which measures the health of the manufacturing sector, to remain under the neutral level of 50.

"Latest data implied that the net decline in new orders was partly driven by a decline in new business from abroad. New export orders fell for a second successive month and at the fastest rate since the start of the year. China was noted in particular as a source of demand weakness during the latest survey period," the report said.

Excess production also added to inventories during July, causing stocks of finished goods to rise to the sharpest degree since June last year. Inventories have now grown for two months in a row.

Output charges were cut further in July. Discounts were reported to reflect intensifying market competition and efforts to stimulate sales.

"There was some evidence that output prices were being reduced to help clear excess inventory at plants," according to the report.  

In contrast, input prices continued to rise. Inflation has been a serious factor seven months in a row, with a limited supply of input reported to have pushed up prices. There was also evidence that a stronger US dollar had raised import costs.

Vietnamese manufacturers left their staffing levels unchanged during July. While some hired more employees to help boos production; others cut their staffing levels due to reduced new orders.

Commenting on the Vietnam Manufacturing PMI survey, Trinh Nguyen, Asia Economist at HSBC said:

"The further deterioration of Vietnam manufacturing activity reflects both weak domestic and external conditions. The decline of new exports was primarily due to weakness from China demand. External conditions will likely improve in the fourth quarter with US, Japan, Europe, and China demand likely picking up. While that will provide some support, much of Vietnam's malaise is domestic born and requires a faster pace of reform."

That the State Bank of Vietnam SBV recently cut the interest rate it charges for loans in open market operations (OMO) by 50 basic points to 5.5 percent from its previous rate of 6 percent, to ease liquidity conditions, is likely a stop-gap solution as fundamental reforms are required to resolve Vietnam credit challenges, she said.

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