Temporary slowdown projected for general economy

Difficulties at home and abroad have contributed to a low 3.72 per cent growth rate in the Vietnamese economy in the first six months of 2023. What is your take on it, in the context that the government is still keeping its goal to hit 6.5 per cent growth this year?

Wanwisa May Vorranikulkij, senior economist from the ASEAN+3 Macroeconomic Research Office

In the first half of this year, Vietnam’s economic growth fell short of our expectations, although annual GDP growth picked up slightly in the second quarter of 2023. The weakening economic growth during the first half was primarily attributed to external headwinds.

The global economic slowdown dampened Vietnam’s manufacturing sector and exports, which are the main drivers of growth and job creation in the economy. Meanwhile, the tailwinds from China’s reopening were lower than expected. The contraction of manufacturing production and uncertain employment prospects consequently spilled over into domestic demand, and the pent-up demand from domestic consumption phased out faster than we initially expected.

We expect the Vietnamese economy to grow at 4.4 per cent in 2023, falling short of the government’s growth target of 6.5 per cent. Looking ahead, as Vietnam is an export-oriented economy, lingering global economic uncertainty will continue to dampen the Vietnamese economy for the remainder of the year. Vietnam’s major export destinations – the US, EU, and China – are expected to experience slower growth in the second half of this year.

The US Federal Reserve will likely maintain its tightening stance, and US headline inflation remains elevated. Therefore, Vietnam’s manufacturing sector and exports will most likely continue to contract in the second half of the year.

What are you expecting from the prospects of the Vietnamese economy?

We expect the recent slowdown in Vietnam’s economy to be temporary, and growth will rebound in 2024. Economic growth is forecasted to gradually gather pace in the second half of the year. Exports, especially in electronics, are forecasted to turn around from the end of the fourth quarter of 2023 to early next year, led by the expected recovery of the global semiconductor market in Q4.

Likewise, the construction and real estate sectors are expected to recover around the same period, attributed to easing financing conditions. An increase in tourist arrivals would also support the growth. Additionally, easing monetary policy, together with an expansionary fiscal stance, will shore up the growth and lessen the impacts from external headwinds.

As Vietnam continues to receive foreign direct investment amid the global economic slowdown, the underutilised production capacity available in the country can speed up the country’s growth once external orders turn around.

Do you see any disadvantages for Vietnam now and in the coming months?

Downside risks and challenges to Vietnam’s growth outlook stem from external factors. A sharper slowdown in the US and the EU or a slower pace of recovery in China would weigh on global demand, hurting Vietnam’s manufacturing sector and exports.

Due to the persistence of core inflation, many major central banks would maintain a tight monetary policy stance. Sustained high funding costs and tight funding conditions might trigger an economic slowdown in Vietnam’s major export destinations.

Ongoing US-China trade tensions as well as the prolonged Ukraine conflict may pose an obstacle to recovery from the supply side. Over the longer term, the tardy development of domestic supporting industries and a shortage of skilled labour continue to hinder the country’s efforts to move up the global value chains.

The economy is showing signals of recovery. What should be the key policies for the economy to continue bouncing back?

Due to continuing uncertainty over growth prospects, the government should maintain its expansionary macroeconomic policies in the second half of 2023. In light of available fiscal space and with the economic recovery still subject to heightened uncertainty, greater fiscal support may be warranted to support the nascent economic recovery, while targeted support to micro, small, and medium-sized enterprises and low-income households should be considered.

In addition, it is important to ensure the continued implementation of the public investment programme. On the monetary policy front, the rate cuts were welcome moves, which have lowered borrowers’ financing costs and financial burden.

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