Vietnam’s factory growth crumbles in April as Middle East war sends costs to 15-year high

New orders fell for the first time in eight months as fuel and oil prices surge

Vietnamese manufacturers are showing the clearest signs yet that the war in the Middle East is beginning to choke demand, with new orders falling for the first time in eight months in April as soaring fuel, oil and transportation costs pushed inflationary pressures to their highest level in 15 years.

The S&P Global Vietnam Manufacturing PMI fell to a seven-month low of 50.5 in April, down from 51.2 in March. The reading kept the index in positive territory for a tenth consecutive month, but only just — and analysts warned that the underlying picture was considerably more troubling than the headline figure suggested.

Output continued to rise, extending its run of growth to 12 consecutive months, but the pace of expansion slowed to its weakest since June last year. Firms attributed the deceleration to rising inflationary pressures, supply shortages and the market instability caused by the Middle East conflict.

The drop in new orders was the most telling indicator of deteriorating conditions. Rising prices hampered manufacturers' ability to secure fresh business domestically, while the impact on exports was even more severe. New orders from abroad fell markedly for the second month running, hit by the dual pressure of higher prices and surging transportation costs.

The inflationary numbers were striking. Input costs rose at the fastest pace in 15 years — since April 2011 — with more than half of all respondents reporting a rise in prices during the month. Fuel, oil and higher freight rates were the most frequently cited culprits. Output charges rose at an equally sharp pace, also the fastest since April 2011, as manufacturers passed the burden on to customers.

With new orders contracting, firms moved swiftly to cut back. Staffing levels fell solidly for the second consecutive month, as manufacturers reduced headcounts, trimmed working hours and contended with employee resignations. Purchasing activity and inventory holdings were also cut. Backlogs of unfinished work fell at the fastest rate since last September, pointing to a further easing of workloads rather than any recovery in capacity pressure.

Supply chains deteriorated sharply. Delivery times lengthened at the most pronounced rate in four and a half years, as shortages of raw materials and disruptions to shipping availability compounded one another. Stocks of both purchased inputs and finished goods were depleted at quickening rates.

Business confidence weakened to a seven-month low, falling below the long-run average for the survey. Firms continued to anticipate that output would grow over the next 12 months, pinning hopes on an eventual recovery in new orders and a more stable market environment — but the mood was noticeably more subdued than in recent months.

Andrew Harker, economics director at S&P Global Market Intelligence, said the data pointed to a sector under mounting pressure. "Rising costs for fuel, oil and transportation [are] hampering both demand and supply," he said. With new orders already in contraction, he warned that output was likely to follow unless price and supply conditions improved in the near term.