Vietnam's industrial production index rose 4.4% in August from a year earlier, slowing from July's 6.1% rise, government data showed Monday. Through the first eight months of this year, the index was up 4.7% from the year-earlier period.

"Domestic demand is still very weak, while firms' inventory levels are too high now, making it difficult for the country to boost industrial production," independent economist Le Dang Doanh said.

The data come as Vietnam has struggled to right its economy after runaway inflation, poor planning and reckless lending threw the former high-flyer off track.

A series of rate increases brought inflation way down, but—together with the euro-zone crisis and the sluggish U.S. recovery—put a brake on Vietnam's export-led growth. Gross domestic product rose 4.38% on-year in the first half of the year, its slowest pace in three years.

Vietnam's imports rose much more slowly than exports in the first eight months of this year, as the slowdown means fewer materials are needed for production. However, so far the country has managed to maintain its exports of raw materials and farm products.

Data from the General Statistics Office showed that exports rose 17.8% on-year in the January-August period to $73.35 billion, while imports rose 6.7% to $73.41 billion. Retail sales rose 17.9% on-year since January, but that's down from levels above 20% recorded a few months ago.

In a statement posted on its website Monday, the government said contracting domestic investment and consumption have resulted in slower imports, which will eventually hurt domestic production and then exports.

"I don't see any chance for Vietnam to boost industrial production at this point," Mr. Doanh said, adding that the government must first help firms reduce their inventory levels.

In a note Monday, ANZ Research said it was scaling back its forecast for Vietnam GDP growth this year, to 5.2% from 5.5%.

"Though we continue to expect real GDP growth to pick up in 2H on loosened monetary policies, the pace of recovery will likely be slower than initially anticipated," ANZ Research said. It also lowered its 2013 GDP growth forecast to 6.1% from 6.3%.

The house said it expects the State Bank of Vietnam to cut its policy rates by another 1% in the coming months as the outlook for growth deteriorates.

On the bright side, slowing imports have resulted in a much narrower trade deficit, helping to keep the local currency stable this year.

The trade deficit in the first eight months of the year narrowed to $62 million, from a deficit of some $5.7 billion a year earlier.

Last Friday, the government said the consumer price index rose 5.04% on-year in August, its slowest pace in nearly three years and well below the peak of 23% inflation a year ago.

State Bank of Vietnam Governor Nguyen Van Binh said last week that Vietnam's GDP growth this year is expected to be 5% or slightly higher, adding that inflation should be limited to 6%-7%.

By Vu Trong Khanh - The Wall Street Journal - August 27, 2012