Vietnam Manufacturing Purchasing Managers’ Index (PMI) dipped to 51.6 in October, from 53.3 in September, with weaker increases in output, new orders and employment, according to Nikkei’s IHS Markit report.

According to the report, released on Wednesday, this signaled a modest improvement in business conditions that was the least marked in five months. That said, the health of the sector has strengthened continuously since December 2015.

Central to the weak improvement in operating conditions was a much slower rise in manufacturing output. Production increased at a marginal pace that was the weakest in the current 12-month sequence of expansion. Where output rose, panellists linked this to higher new orders. On the other hand, some respondents mentioned signs of softer demand.

“New orders continued to rise solidly in October, albeit to a lesser extent than September. New export order growth, meanwhile, accelerated and was the strongest in six months. With new business increasing at a solid pace and output rising only marginally, manufacturers used inventories to help fulfill orders,” the report states, adding that as a result, stocks of finished goods decreased for the fourth consecutive month. Rising new orders resulted in further accumulation of backlog of work, the fourth in as many months. This was despite solid job creation in October. Employment has now risen in each of the past 19 months, with the latest increase only slightly weaker than September’s six-month high.

After having risen at the fastest pace in over six years in the previous month, input costs increased sharply again in October and at a rate that was little-changed from September. Where inflation was recorded, panellists often mentioned raw material shortage. Output price inflation was also broadly unchanged from the end of the third quarter as charges rose for the second month running.

As well as pushing up prices for inputs, supply shortage also resulted in longer suppliers’ delivery times in October. Flooding linked to storms also contributed to longer lead times as transport routes were affected.

Manufacturers increased their purchasing activity at a solid pace, although it was weaker than the previous month. Stocks of purchases rose only marginally, with the latest accumulation the weakest in the current 16-month sequence of increasing pre-production inventories.

Firms remained optimistic that output will rise over the coming 12 months, linked to predictions of improving market demand and meeting of company targets. Sentiment was more positive than in September.

“The Vietnamese manufacturing sector paused for breath in October, with output rising only marginally during the month. New order growth also slowed, but remained solid amid a faster increase in new export orders. There was further evidence of material shortage impacting the sector, leading to higher input costs and delivery delays,” Andrew Harker, associate director at IHS Markit, said.

“The manufacturing sector has been a strong performer within the Vietnamese economy so far this year. Therefore, growth will need to rebound from October’s slowdown over the rest of 2017 to help meet the GDP target of 6.7 per cent growth. IHS Markit is currently forecasting a rise of 6.5 per cent,” he said. — VNS