Domestic GDP to bark in accord with global rates

Dr. Chris Kamm

Without question, the Year of the Dog will be a dynamic year for Vietnam. With a backdrop of robust global growth, Vietnam should experience similar growth in its GDP. As the world continues to experience lower-than-normal inflation and increasing growth, economic activity should continue to spill over from developed economies to developing economies like Vietnam.

Over the past decade, Vietnam has become much more self-sustaining economically. Industries from manufacturing to service have developed strictly and solely for the domestic economy. As national GDP has improved, GDP per capita has also surged. As this has taken place, consumption and investment have also skyrocketed. Although Vietnam is still dependent on foreign direct and indirect investment, each year the dependence becomes less and less. Thanks to this development, Vietnam is able to control more of its country and economy from within.

Much to the surprise of many economists, the world economy has experienced significant improvements. GDP around the world has largely normalised; central banks have begun the process toward returning interest rates to normal heights. It has been many economic cycles since the world has experienced concerted economic growth. With concerted economic growth, the world can experience more even growth. This growth is vital to countries such as Vietnam which still, to some degree, depend on foreign trade as well as foreign investment. Remember that the best-performing stock market in Asia in 2017 was not China, but Vietnam. So it can be assumed that Vietnam was a beneficiary of the global expansion and worldwide growth.

As global growth continues to improve in the Year of the Dog, Vietnam should again be a beneficiary. And as central banks around the world continue to maintain a moderate interest rate and loose monetary policy, it is likely that foreign investment, both direct and indirect, will flow into Vietnam. This phenomenon should not only help Vietnam’s GDP, but also the stock market and the real estate market. It can be expected that as the growth ‘trickles down’ to developing economies from the developed economies, these expansive policies will assist Vietnam in maintaining a robust GDP growth well over 6 per cent.

While Vietnam has made much progress in self-sustainability, its economy remains relatively tied to global trends

Economic growth can be elusive and can start and stop with little to no forward notice. Sentiment shifts can occur, which can slow economic growth considerably domestically as well as globally. And although it is possible this might occur in the Year of the Dog, it is not probable. It is probable that the economic expansion that occurred in 2017 will continue in 2018 and provide a bolster to the world economy. Sentiment (whether spending or investment) is expected to remain at elevated levels throughout 2018.

Central banks must make certain that the global economy does not overheat. Overheating of the global economy can cause central banks to be “hawkish” and desire to raise interest rates and restrict the money supply to limit economic growth or to curb inflationary trends. Overheating of the global economy would have a detrimental effect on the economic growth in Vietnam, likely translating to lower GDP growth and a more unstable economic situation.

The question of when inflation will hinder domestic and global growth is very important. Inflation is a constant concern of central banks around the world. Inflation is often elusive and difficult to predict. Central banks attempt to formulate policies that will moderate inflation, but these policies are not often successful, as economic circumstances are in a constant state of flux. High inflation can cause distortions in economic activity and a need for central banks to limit lending and restrict economic activity. When higher-than-expected or desired inflation occurs, central banks are often caught in a cycle of raising interest rates, known as being “behind the curve”. It is therefore imperative that central banks do not let GDP growth exceed realistic expectations. If growth is kept in check, moderate growth will lead to muted inflation and continued, progressive growth. But eventually, inflation does become an issue in every economic expansion. Proper monetary and fiscal policies worldwide can prolong the expansion and moderate inflation.

So what could derail the growth prospects for Vietnam in the Year of the Dog? Many factors could cause temporary reductions in growth, but a more long-term factor that could possibly slow growth would be inflation. Inflation often causes central banks to become restrictive with monetary policy and eventually results in lower economic growth. As that lower economic growth might cause recessionary pressure, lowering inflation can eventually provide a more stable economic environment in the future. So although the short-term effect of inflation is negative, its longer-term effect is positive.

Inflation can come in many forms, one of which is inflated asset prices. Real estate in Vietnam has experienced abnormally high gains in the past few years. Correlatively, the Vietnamese stock markets have also experienced extraordinary gains. Though the stock markets in total sell at a reasonable price-earnings ratio of 16:17, specific industries such as consumer staples (beverages and food) are technically overpriced and could experience price moderation. That does not mean that the stock markets will not continue to increase in price, as investors should expect given the growth prospects for 2018, but some industries and securities within industries will experience moderate price appreciation.

Real estate values have appreciated considerably, especially in Ho Chi Minh City and Hanoi. Abnormal hikes in real estate prices can cause distortions in economic activity as a greater portion of individuals’ and corporate funds must be devoted to real estate development than normal, putting restrictions on other purchasing and spending. It is important that the government assists the market to maintain moderate increases in real estate prices and limit distortions. Additionally, real estate speculation causes further distortions in relative pricing and can hinder economic growth. Although it can be assumed that this challenge may persist in 2018, it will likely be moderated.

Lastly, developed country stock markets are expensive in relation to historical standards. Price-earnings and price-to-sales ratios are high, and although global growth prospects are bright, stock markets are vulnerable to short-term volatility and fluctuations, like all asset classes. Investors, in general, have become accustomed to rising stock markets, not volatile ones. Unfortunately, it is likely that volatility will return to stock markets around the world, which will encourage the tempering of expectations, at least in the short term. It is not uncommon to experience greater market fluctuations as global growth continues, and although 2017 did not experience much stock market volatility, it is not accurate to believe that this is normal. Normally, stock markets often experience wild fluctuations.

Even though volatility should be expected in the Year of the Dog, stock markets should record a decidedly positive year around the world. There is no evidence of economic deceleration occurring and the continued ramping up of investment around the world is a precursor to growth in GDP as well as asset pricing. Economic growth portends economic and investment prosperity.

Investors and consumers can expect the Year of the Dog to be one of prosperity.