Vietnam economy: Firm rebound amid challenges

Vietnam’s economy started 2022 on a firm footing. 

>> Vietnam emerged as a regional outperformer

Challenges facing the world

As we entered 2022, the COVID-19 outbreak started to subside and recovery became a buzzword everywhere. Last year, the global economy grew by 5.5%, the highest growth rate since 1976, offering optimism that the momentum will likely remain strong this year.

However, it’s just temporary until late February, when the Russia-Ukraine war began and its prolonged tension has not been resolved yet. Furthermore, COVID-19 is still lingering amid new waves of infection in several countries, while the world is facing labor market challenges, supply constraints, and rising inflation pressures.

Against this backdrop, international institutions have weakened their forecast of global economic growth prospects. The UN offered 3.1% instead of 4.0%. The WB expects a slowdown in the global economy and slashes its growth estimate to 2.9% in 2022, 1.2% below the January forecast. The IMF reduced its global growth forecast to 3.6%, a 0.8% decrease from January projections. estimates that global GDP will slowdown and hit 3%, a 1.5% cut from its projection back in December.

Vietnam is back firmly

Similarly, Vietnam’s economy started 2022 on a firm footing. Sticking with the policy to "co-live with the coronavirus", Vietnam has accelerated its vaccination drive and gradually removed local restrictions, fueling consumer sentiment and leading to an ongoing rebound in local consumption. Indeed, Vietnam’s total goods retail sales and consumer service revenues grew 11.7% y-o-y in 1H2022, or 7.9% if inflation was excluded (vs. 1.9% in 2021). The grand re-opening from mid March has been especially crucial for Vietnam’s service recovery. In the first half of 2022, 602,000 foreign tourists flocked to Vietnam, around 6.8 times of 2021’s level, a clear sign of recovery.

However, we expect to see a slow rebound in tourism this year due to COVID-19, which has a psychological impact on foreigners who fear going abroad and a dwindling desire among consumers around the globe to open their wallets because of soaring inflation. Another driving force behind this slow recovery is the tension in Russia together with China’s "zero COVID" policy, which holds Vietnam’s tourism back from a quick bounce back given these two are its two main sources of visitors.

Meanwhile, manufacturing continues to roar, growing firmly at 8.48% y-o-y. Mobile phone component production particularly expanded by 22.2%. In addition, the PMI rose from 51.7 in April to 54.7 in May, recording a 12-month-high before dropping slightly to 54 in June. Thanks to multi-year consistent FDI inflows in tech manufacturing, Vietnam has successfully transformed into a rising global base. While the pandemic partially disrupted the process, interest remains high. For example, Samsung has recently started building a USD220m R&D center in Hanoi, its largest one in Southeast Asia, and is set to expand its plants in Bac Ninh, Thai Nguyen. Apple has had 11 factories of its Taiwanese manufacturers in its supply chain moved to Vietnam.

Most importantly, Vietnam’s key growth engine is set to see a strong recovery, as the labor shortage continues to ease. After the Tet holidays, over 90% of workers have returned to Ho Chi Minh City (HCMC). The country’s exports grew 17.3% y-o-y in the first 6 months of 2022. Its 1Q22 GDP increased by 7.72% year on year, resulting in 6.42% year on year growth in 1H2022.All of these point to a steady recovery in Vietnam. Thus, HSBC now expects the economy to grow at 6.9% (up from our previous forecasts of 6.2% and 6.6%) in 2022, likely topping the region.

Despite the optimism, headwinds prevail. In particular, Vietnam is facing multiple challenges given elevated global energy prices. This will increase its energy bills, deteriorating its terms of trade position. Higher oil prices will raise residents’ cost of living, dampening the pace of recovery for private consumption, especially when the labor market has shown signs of recovery. Global energy inflation continues to gain pace, pushing domestic petrol prices to new highs. Given elevated global oil prices, we expect the trend to persist, putting upward pressure on inflation. That being said, despite high energy costs, moderate food inflation – given relatively stable local production – has so far helped curtail headline inflation.