Subdued demand dampens manufacturing outlook

January 05, 2023 | 17:10
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Vietnam's manufacturing sector continued to face challenging business conditions amid deteriorating demand both domestically and abroad.
Subdued demand dampens manufacturing outlook

The S&P Global Vietnam Manufacturing Purchasing Managers' Index (PMI) slipped from 47.4 in November to 46.4 in December to mark the second consecutive softening of operating conditions across the Vietnamese manufacturing sector. The latest moderation was the strongest since the pandemic-related downturn seen in August 2021.

Reflecting the softer inflows of new work, manufacturers scaled back production volumes in the year's final month. Furthermore, the rate of contraction was rapid and the strongest since September 2021, with the decline in output surpassing the decline in new orders. As a result, backlogs of work increased, ending a four-month period of depletion.

With muted customer demand and new orders, manufacturers started to cut their staffing levels. Employment softened rapidly, posting the sharpest decrease in 14 months.

At the same time, manufacturers also trimmed input buying. However, stockpiles of purchases began to amass for the first time in three months as output plummeted so drastically that inputs were frequently held in stock rather than being employed in the manufacturing process.

Input costs rose at the quickest pace in five months. Manufacturers have to pay higher costs for raw materials, gas and shipping. Meanwhile, suppliers' delivery times have lengthened on a monthly basis.

There were some signs that inflationary pressures were resuming, but the most recent increase in input prices was still far lower than those observed earlier in the year, allowing businesses to decrease charges to consumers to win more new orders.

Some manufacturers expressed fear that difficult market circumstances would continue through 2023. However, many manufacturers expressed hope that demand would increase, which would increase new orders and output.

Andrew Harker, economics director at S&P Global Market Intelligence said, “The Vietnamese manufacturing sector continued to struggle in December, partly due to subdued demand conditions in the key export markets of Mainland China, the EU and US. Securing new work is likely to remain difficult until there is a pick-up in these markets, with several firms indicating that they expect demand to remain subdued in the near-term at least."

"Manufacturers have responded quickly to the downturn in new orders, with the latest PMI data showing sharper reductions in output, employment and purchasing activity, as well as price cuts to try and stimulate demand. S&P Global Market Intelligence is predicting a rise of 6.8 per cent in industrial production for 2023, representing a slowdown from 2022," Harker said.

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