Vietnam’s industrial sector could continue its recovery

Vietnam’s industrial sector maintained its modest recovery in August 2023

Vietnam’s industrial sector maintained its modest recovery in August 2023, as the Index of Industrial Production (IIP) rose by 2.9% mom and by 2.6% yoy (vs. an increase of 3.7% yoy in the previous month). August's index was still much lower than the normal growth rate (7–9% annual growth rate). Along with that, Vietnam’s PMI climbed to 50.5 points in August after 5 months of falling below 50 points.

Specifically, S&P Global Market Intelligence (the provider of Vietnam's PMI Index) pointed out several highlights for Vietnam’s manufacturing sector in August 2023, including:

First, the number of new orders for production and new export orders rose for the first time in six months.

Second, manufacturing output also bounced back in August 2023, ending five months of contraction.

Third, in August 2023, the increase in new orders and output helped boost purchasing activity. The report said this was the first increase in purchasing activity in the past six months. This is considered the most significant increase since September 2022.

Fourth, the temporary improvement in demand helped lift business confidence. Optimism about the outlook for output over the next 12 months was the highest in five months but remained below the index's average amid persistent concerns about demand.

Regarding the sub-sector, some industrial activities witnessed strong improvement in August 2023, including: manufacture of rubber and plastic products (3.5% mom, 10.5% yoy), food production (6.6% mom, 11.4% yoy), manufacture of textiles (2.2% mom, 15.1% yoy), manufacture of furniture (4.6% mom, 22.9% yoy), and basic metals production (3.5% mom, 24.8% yoy).

On the other hand, some industrial activities continued to shrink this month, such as the extraction of crude petroleum and natural gas (-11.0% mom, -12.8% yoy) and the manufacture of coke and refined petroleum products (-14.7% mom, -17.9% yoy).

VNDirect expects the recovery of the manufacturing sector to accelerate in the coming months thanks to the following catalyst:

First, the easing of inflationary pressures in advanced economies for the remainder of 2023 will be a factor in underpinning consumer confidence and spending in these markets in the coming months. Therefore, VNDirect expects Vietnam's export orders to rebound for the remainder of 2023, driven by a recovery in consumer demand and decreasing inventories in advanced economies.

Second, domestic demand is expected to recover more strongly in the coming months thanks to (1) positive impacts from fiscal stimulus policies (reducing taxes and fees, increasing base salaries, etc.) and (2) a recovery of consumption lending amid a falling interest rate environment. The recovery in consumer demand will improve business prospects and prompt manufacturers to increase output.