A reading above 50 indicates economic expansion, while a reading below 50 points toward contraction. Vietnam's PMI has stayed above 50 for more than two years. The latest strengthening of business conditions was the 26th in successive survey periods and the most marked in nine months. As such, the Vietnamese manufacturing sector has made a strong start in 2018, registering sharper increases in output, new orders and employment, according to IHS Markit’s latest report.

New orders continued to rise at the start of the year amid improving client demand. Moreover, the rate of expansion accelerated to a four-month high. Positive demand conditions were also highlighted in export markets, supporting a further solid increase in new business from abroad.

Rising new business supported a second successive monthly expansion of manufacturing output. The rise was solid and the fastest since last September. Following the report, firms made further efforts to expand their operating capacity in January, taking on extra staff at a sharp pace. In fact, the rate of job creation was at a 16-month high. Extra capacity enabled manufacturers to reduce backlogs of work in spite of rising new orders.

Outstanding business decreased for the third month running. Production growth was also supported by a marked increase in purchasing activity, and the fastest in 13 months. Meanwhile, strong demand for inputs and raw material shortages led to further delays in deliveries from suppliers.

“After helping to drive growth of the overall economy in 2017, the first month of 2018 provided further welcome news for the Vietnamese manufacturing sector. Faster rises in output, new orders and employment were recorded amid improving demand conditions,” said Andrew Harker, Associate Director at IHS market.

“With the TPP trade agreement also back on the agenda, there is plenty of optimism that the sector will continue to grow as the year progresses,” he added.

Raw material shortages also contributed to rising input costs. The rate of input price inflation accelerated and was one of the strongest in the series history. The pace at which output prices increased also quickened and was the strongest in almost a year. Panelists mentioned higher input costs and improved client demand.

A strong rise in purchasing activity resulted in a second successive monthly increase in preproduction inventories. The  rate of accumulation, however, remained marginal. Stocks of finished goods decreased, meanwhile, as inventories were used to support sales.

Manufacturers in Vietnam generally expect client demand to increase further over the course of 2018, thereby supporting optimism towards output growth. Sentiment was broadly in line with that seen in December. Increases in international investment and business expansion plans were also factors likely to lead output to rise.

However, Harker noted: “On a more cautionary note, inflationary pressures intensified, with input costs up at one of the sharpest rates in the survey’s history. This adds to evidence that strong growth globally is putting pressure on manufacturing supply chains and pushing up costs for raw materials.”