On the morning of June 1, 2023, S&P Global released the Purchasing Managers' Index (PMI) report of Vietnam's manufacturing industry for May 2023.

In which, there were three highlights: the output and the quantity of new orders fell more sharply; input costs fell for the first time in three years; and employment and purchasing activity fell.

Data for May 2023 showed that the manufacturing industry in Vietnam continued to decline as demand continued to be weak. The output and quantity of new orders plummeted as companies reduced employment and purchasing activity, respectively. Meanwhile, business confidence continued to decline.

Evidence continued to show that there was downward price pressure in the manufacturing sector. Input costs fell for the first time in three years, which meant that manufacturers were able to reduce selling prices to boost demand.

The Purchasing Managers' Index (PMI) of Vietnam’s manufacturing industry fell to 45.3 points in May from 46.7 in April, the third consecutive month of decline in business conditions. Moreover, this decrease in the health of the manufacturing industry was the most significant since September 2021.

There were multiple reports showing weak customer demand in the latest survey. The effect of this could be felt most clearly in the number of new orders, as this index has rapidly fallen to its biggest drop in 20 months. Difficulties in maintaining revenue were also recognized in export markets as the number of new orders from abroad fell for the third straight month.

With new orders continuing to decline, companies also reduced output in the middle of the second quarter of the year. Output fell for the third month in a row, and the rate of decline was sharp, as it was the fastest since January. Output fell in all three manufacturing sectors, with the most drastic decline being in the intermediate goods manufacturing sector.

The S&P Global report showed that the weakness in demand continued to affect business confidence as this index decreased for the third straight month to its weakest level since November 2022. Any remaining optimism was often based on hopes that the manufacturing recovery would take place in the coming months.

Some companies reduced the number of employees due to a reduced workload. This, plus a number of voluntary layoffs, led to a continued decline in employment in May, although the decrease was milder than in the previous survey.

Although companies reduced operational capacity, they were still able to handle most of the backlog in May. Unfulfilled work fell at the fastest rate since June 2021.

Manufacturers have reduced purchasing activity at a significant rate, thereby extending the current reduction period to three months. Since then, the inventory of purchased goods has also decreased, and the decrease was the largest in nearly two years.

Inventories of finished goods also fell as companies adjusted manufacturing operations to accommodate a drop in the number of new orders, the first drop in three months.

The demand for input goods continued to decrease, so the supply chain was not under pressure. As a result, the performance of sellers improved for the fifth time in a row, the largest improvement since February 2015.

Weak demand also caused suppliers to decline prices. Therefore, input costs fell for the first time in three years. Falling input prices helped companies easily lower their selling prices and boost demand. Selling prices fell for the second consecutive month, and the rate of decline was nearly the same as in the previous survey.

Commenting on the survey results, Mr. Andrew Harker, Chief Economist at S&P Global Market Intelligence, said the plummet in the quantity of new orders in May was cause for concern that Vietnam's manufacturing industry could experience a prolonged decline rather than just a temporary one. Companies responded accordingly by reducing output, employment, and purchasing activity.

"The reduced demand for input goods reduced the remaining pressure on the supply chain, resulting in shorter delivery times and lower input costs," said Mr. Andrew Harker, adding that while business confidence continued to decline in May, there were still hopes among companies that a recovery would take place in the coming months. Therefore, the upcoming data will play an important role in giving any signal of improvement.