The S&P Global Vietnam Manufacturing Purchasing Managers' Index (PMI) rose to 48.7 points in July from 46.2 in June.

The latest reading signalled a fifth successive monthly deterioration in operating conditions, albeit one that was only modest and the weakest in this sequence.

The trend in the headline index was matched by a number of the survey's sub-indices in July, with rates of contraction in output, new orders, and employment either the lowest or joint-lowest in the respective sequences that stretch back to March.

In particular, new orders declined just slightly in July, despite some indications that demand was stabilising. However, manufacturers indicated that overall demand was still weak, especially in export markets. New export orders have declined far faster than that rate of new business, highlighting the specific difficulties internationally.

Some businesses attributed a decrease in new orders to the dampening demand from European clients. Even if the problem of power interruptions – which were common in June – has been resolved, businesses still scaled back on production in July, with new orders dropping further.

Backlogs of work continued to decrease in July due to the lower new order rate, with the pace of depletion accelerating from that seen in June.

There were signs that the sector-wide weakening in demand had a role in the unwanted accumulation of inventory holdings. Stocks of finished goods rose for the first time in three months, while those of inputs accumulated for the first time in the year-to-date as production was scaled back.

Manufacturers also lowered employment for the fifth month in a row, but at a more modest pace.

In July, business optimism increased to a four-month high but remained largely flat. Firms remain concerned about the current difficulties in gaining new business, but they are optimistic that a future recovery in customer demand will feed through to increased output growth.

Andrew Harker, economics director at S&P Global Market Intelligence said, "The Vietnamese manufacturing sector remained under pressure in July, according to the latest PMI data, with firms again struggling to secure new business and scaling back output accordingly. Despite the latest drop in production, companies were still left with unsold stock. There were again falls in prices and a shortening of suppliers' delivery times due to the widespread spare capacity in the sector."

"On a more positive note, there were signs that demand may be stabilising, as new orders fell at the softest pace in five months. Firms will be hoping that this feeds through to renewed growth of orders in the months ahead," he added.