Vietnam's manufacturing sector returned to growth in August as some signs of recovery in demand supported renewed increases in both new orders and production, according to the S&P Global Vietnam Manufacturing Purchasing Managers' Index™ (PMI).

The PMI moved back above the 50.0 mark for the first time in six months during August. At 50.5, the index was up from 48.7 in July and pointed to a marginal monthly improvement in business conditions in the sector.

Firms expanded their purchasing activity accordingly, but employment continued to fall marginally as firms were reluctant to take on extra staff given still fragile demand.

Renewed increases in prices were also recorded midway through the third quarter. Input costs rose for the first time in four months, while selling price inflation was signaled for the first time since March.

According to S&P Global, the nascent recovery in the health of the sector reflected tentative signs of demand improving.

Manufacturers recorded a first increase in new orders for six months, while new export business also rose following a five-month sequence of decline. Growth rates were modest, however, amid some reports of ongoing demand fragility.

Similarly, manufacturing production returned to growth in August, ending a five-month period of falling output. However, the rate of increase was only marginal.

Recoveries in output and new orders were most keenly felt in the investment goods category.

Firms responded to higher new orders and greater output requirements by expanding their purchasing activity at a solid pace. The rise was the first in six months and most pronounced since last September. In turn, stocks of purchases also increased, the second month running in which this has been the case.

The picture for employment was less positive, however, with row. That said, the pace of reduction was the weakest in this sequence and only marginal.

Ongoing reductions in employment reflected continued signs of spare capacity in the sector, with backlogs of work decreasing for the eighth consecutive month.

Firms also recorded a build-up of stocks of finished goods for the second month running amid some reports that weak demand had left finished products unsold.

August data pointed to a solid increase in input prices, thereby ending a three-month period of decline. A number of panellists linked higher input costs to rising oil prices, while increased food prices were also mentioned. In turn, firms also raised their own selling prices, albeit only slightly. The increase in charges was the first since March.

Suppliers' delivery times shortened for the eighth successive month as stocks at suppliers remained sufficient to deal with orders despite a pick-up in demand for inputs during August. The improvement in vendor performance was solid, albeit the least marked since May.

Tentative improvements in market demand helped to strengthen business confidence midway through the third quarter, with firms hoping for a continued recovery in the months ahead. Optimism in the 12-month outlook for production was the highest in five months, but still below the series average amid ongoing concerns around the strength of demand.

Andrew Harker, economics director at S&P Global Market Intelligence, said that the latest S&P Global Vietnam Manufacturing PMI paints a more encouraging picture regarding the health of the sector than had been the case in recent months, with output, new orders, exports and purchasing all returning to growth.

Improvements were generally still quite muted, however, as demand conditions remained fragile. It is probably too early to say, therefore, that the sector is in full recovery mode.

Another key aspect from the latest survey was the end of the recent period of falling prices, with both input costs and selling charges up in August, often linked to higher oil prices, he said.