Vietnam’s manufacturing sector showed renewed momentum in May as new orders returned to growth, supporting stronger output and continued expansion across the industry.

A production line at Honda Vietnam’s facility in Dong Van II Industrial Park.

The S&P Global Vietnam Manufacturing Purchasing Managers' Index (PMI) rose to 52.8 in May, up from 50.5 in April and reaching its highest since February. The solid overall improvement in business conditions was the eleventh in as many months.

After having fallen modestly in April, new orders returned to growth in May, increasing markedly and to the largest degree in three months.

To some extent, the rise in new business reflected safety stock building among customers amid worries of the effects of a prolonged conflict in the Middle East.

A renewed increase in new export orders was also recorded, ending a two-month sequence of decline. Here though, the pace of expansion was only marginal, as high transportation costs and logistics issues limited international demand.

Renewed growth of new orders was matched by a marked expansion of manufacturing production in May. Output rose for the thirteenth successive month, and at the fastest pace since February.

Stockpiling efforts were also evident among manufacturers as purchasing activity increased for the first time in three months, and at a solid pace.

The rate of input cost inflation continued to accelerate midway through the second quarter, quickening for the fourth consecutive month to the fastest since April 2011. Fuel, oil and transportation were the main drivers of higher input costs, according to respondents.

Selling price inflation also remained elevated and was among the sharpest in the past 15 years, despite easing slightly from that seen in April.

Higher costs for fuel and shipping, plus issues with logistics, caused a further lengthening of suppliers' delivery times in May. The latest deterioration in vendor performance was less pronounced than in the previous survey period, however.

​A further lengthening of lead times meant that stocks of purchases continued to fall, despite an expansion in purchasing activity. Moreover, the rate of depletion in preproduction inventories was the fastest in just under a year.

Stocks of finished goods were also down, albeit to a smaller degree than in April.

Despite a renewed rise in new orders in May, recent demand weakness meant that firms still had sufficient capacity to handle incoming business and work through backlogs. As a result, outstanding business decreased for the second month running.

Confidence in the year-ahead outlook for production improved to a three-month high in May amid hopes for an increase in new orders and business expansion plans.

Sentiment remained relatively muted, however, reflecting concerns about the ongoing impact of the war in the Middle East.

Andrew Harker, Economics Director at S&P Global Market Intelligence, said on the face of it the latest S&P Global Vietnam Manufacturing PMI provides some positive news as new orders rebounded in May, leading to a similarly marked increase in manufacturing production.

The headline PMI hit its highest since just before the outbreak of war in the Middle East.

"Digging a little deeper, however, sounds a note of caution, with at least some of the growth in May driven by stockpiling efforts amid the disruption caused by the war. There is some question therefore as to the sustainability of this upturn," he said.

Meanwhile, according to Harker, firms continue to face elevated price pressures, with input cost inflation accelerating again after hitting a 15-year high in April.

How events unfold elsewhere will again be central to determining the sector's performance over the months ahead, he noted.

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