The December PMI, down from 50.5 in November, posted below the neutral 50.0 mark for the eighth time in the past nine months. The latest deterioration in operating conditions mainly reflected reduced new order inflows, disinvestment of inventory holdings and stagnating production volumes.

The average PMI reading in Q4 2012 is 49.5, up from 46.9 in Q3 and the highest outcome since the third quarter of 2011.

After rising moderately in November, the level of manufacturing output was broadly unchanged during December. Companies indicated that where volumes had been sustained, this had been largely through the depletion of backlogs of work. Market conditions remained subdued overall, reflected in reductions in both domestic and new export orders. The level of new export business contracted for the eighth month running and to a greater extent than signaled in November.

The muted performance of the sector has not yet filtered through to the labor market, as highlighted by job creation being recorded at manufacturers for the third successive month in December. Although the rate of increase in payroll numbers was again only mild, it was nonetheless still one of the fastest signaled since the survey began in April 2011. Higher employment – alongside efforts to sustain production volumes – was also a prime factor underlying the substantial drop in backlogs of work.

Weak demand and rising cost-caution impacted on purchasing and stock holding decisions during December. Input buying volumes were unchanged compared to November levels, as lower demand discouraged companies from raw material purchasing. Meanwhile, a preference for reduced inventory holdings led to lower levels of pre- and post-production stocks.

Average input prices declined for the first time in five months in December, although the rate of reduction was only slight. Lower purchasing costs were mainly attributed to weak demand for raw materials, especially in the domestic market.

December saw average output prices decline for the eighth consecutive month, with the rate of decrease broadly in line with the average for this period. Lower factory gate prices were attributed to weak demand and strong competition.

Commenting on the Vietnam Manufacturing PMI survey, Trinh Nguyen, Asia Economist at HSBC says the economy is stabilizing, as indicated by the output level. However, the economic recovery process is still in its fragile state as external demand remains weak and consumer confidence is subdued. Price discounting measures are being helped by a reduction of input prices. A third expansion of employment shows the resilience of the economy.

Still, while things will likely improve marginally next year, significant changes to consumption behavior are not expected unless meaningful reforms take place, she adds.