Vietnam’s manufacturing sector contracted further in May with a steepening decline in new orders amid worsening global demand, ratings agency S&P Global announced on Thursday.
Sharper falls in output and new orders were recorded in the country, with firms scaling back their employment and purchasing activity accordingly. Meanwhile, business confidence continued to weaken, S&P Global said in its latest Price Managers' Index (PMI) report for Vietnam.
There was further evidence of an easing of price pressures in the sector. Input costs decreased for the first time in three years, meaning that manufacturers were able to reduce their own selling prices in order to try to stimulate demand, the agency said.
The S&P Global Vietnam PMI dropped to 45.3 in May from 46.7 in April and 47.7 in March, signaling a third successive monthly deterioration in operating conditions. Moreover, the latest decline in the health of the sector was the most marked since September 2021.
“The steepening decline in new orders during May is a cause for concern as it suggests that the Vietnamese manufacturing sector may be in for a lengthy downturn rather than a transitory soft-patch,” Andrew Harker, economics director at S&P Global Market Intelligence, said in the report.
“Waning demand for inputs has relieved any lingering pressure on capacity in supply chains, such that we are now seeing shorter delivery times and falling input costs.
"While confidence continued to fade in May, there were still some hopes among firms that a recovery will get underway in the months ahead. The coming data will therefore be key in providing any signals of improvement,” he said.
There were widespread reports of customer demand weakness across the latest survey, S&P noted.
The impact of this was most clearly felt with regard to new orders, which declined rapidly and to the greatest extent in 20 months. Difficulties in securing sales were also evident in export markets, with new business from abroad decreasing for the third month running.
With new orders continuing to fall, firms in Vietnam also reduced output midway through the second quarter of the year. Production was down for the third successive month, and at a marked pace that was the fastest since January. Output decreased across each of the three broad categories of manufacturing, with the sharpest decline among intermediate goods producers.
Demand weakness caused a further hit to business confidence, which dropped for the third month in a row to the weakest since last November.
“Any lingering optimism was often due to hopes that a recovery would get underway in the sector in the coming months,” the global rating agency said.
Some firms responded to lower workloads by cutting staffing levels. This meant that employment decreased again in May, albeit to a lesser extent than seen in the previous survey period. Although firms reduced their operating capacity, they were still able to make substantial inroads into their backlogs of work in May.
Manufacturers in the country, a global manufacturing hub, cut their purchasing activity at a marked pace, extending the current sequence of reduction to three months. In turn, stocks of purchases also decreased and to the greatest extent in just less than two years.
According to S&P Global, stocks of finished goods in Vietnam were also down because firms adapted production to lower new orders. The fall was the first in three months.
Fitch Ratings, another international rating agency, said Wednesday that it forecast Vietnam’s GDP growth of 5.7% in 2023 despite a slowdown in growth to 3.3% in Q1-2023, and 6.5% in 2024, driven by expansion in services and manufacturing.
Fitch added it expected the country’s growth to remain strong, supported by large foreign direct investment inflows.
The rating agency affirmed on Wednesday Vietnam's long-term foreign-currency issuer default rating (IDR) at 'BB' with a positive outlook, reflecting the country’s favorable medium-term growth outlook, strong external liquidity, and lower government debt compared with the peer median.