Việt Nam’s economic recovery continues to firm up as the Year of the Dragon progresses. Growth improved in the second quarter, rising 6.9 per cent year-on-year, according to economists from HSBC Việt Nam.

HSBC economists said the recovery in the external sector has started to broaden out beyond consumer electronics, although a rise in the domestic sector still remains to be seen.

The manufacturing sector has emerged strongly from last year’s woes. PMIs have registered five consecutive months of expansion, while industrial production (IP) has registered a bounce-back in activity for the textiles and footwear industry as well. This has supported robust export growth at double digits, with structural forces like expanding market access for Vietnamese agricultural produce also underway.

However, the domestic sector is recovering more slowly than initially expected, with retail sales growth still below pre-pandemic levels. Encouragingly, the government has put in place measures to support a wide range of domestic sectors that are expected to shore up confidence with time.

Environmental tax cuts on fuel and value-added tax cuts for certain goods and services will last until the end of 2024, while the revised Land Law effective from August will buttress the outlook for real estate. Although it's still too early to tell for certain, the latter seems to have already contributed to a boost in foreign investment in the sector, with recent FDI showing broad-based gains.

The economists said they believed the potential upside risks can offset the temporary economic disruptions from Typhoon Yagi. All in all, Việt Nam looks set to maintain GDP growth at 6.5 per cent for both 2024 and 2025.

As for inflation, price developments are turning more favourable in the second half of 2024, as unfavourable base effects from energy have faded. An expected Fed easing cycle will also help to alleviate some exchange rate pressures. Taking all these into consideration, the economists forecast inflation to remain at 3.6 per cent in 2024, well below the State Bank of Vietnam’s target ceiling of 4.5 per cent. For 2025, they forecast inflation will likely be around 3.0 per cent.

Risks

Typhoon Yagi hit Việt Nam particularly hard after making landfall on 7 September. The Government has reportedly estimated damage at around US$3.3billion with widespread flooding and damage across homes, factories, warehouses and power and transportation infrastructure. Although recovery efforts and a resumption of economic operations are under way, the after-effects of Asia’s strongest typhoon so far this year are expected to persist for weeks.

Prime Minister Phạm Minh Chính has called for all efforts to restore livelihoods to achieve the Government’s growth target of 7 per cent, which is higher than the 6-6.5 per cent growth target set by the National Assembly at the end of 2023.

In addition to global energy prices, Việt Nam is also vulnerable to food shocks. For instance, pork prices have been elevated as the pork supply has been affected by African Swine Fever. That said, pressure on some agricultural products is expected to lessen as the weather transition from El Niño to La Niña brings more favourable harvesting conditions to Southeast Asia.

The end demand for goods will be key in determining the strength of Việt Nam’s recovery, as Western markets make up close to half of Việt Nam’s exports. The trajectory and pace of consumer spending in the West will therefore need to be closely watched. — VNS