Vietnam economy: Waiting for further lift

Growth improved and surprised on the upside in 2Q24, rising 6.9% y-o-y in 2Q24. The recovery in the external sector has started to broaden out beyond consumer electronics, although the pass-through to lifting the domestic sector still remains to be seen.

For one, 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, such as expanding market access for Vietnamese agricultural produce, also underway.

However, HSBC said the domestic sector is recovering more slowly than initially expected, with retail sales growth still below the pre-pandemic trend. Encouragingly, the government has put in place measures to support a wide range of domestic sectors that is expected to shore up confidence with time. Environment tax cuts on fuel and value-added tax cuts for certain goods and services will last until year-end 2024, while the revised Land Law effective from August will buttress the outlook for real estate. Albeit still early, the latter seems to have already contributed to a boost in foreign investment in the sector, with recent FDI showing broad-based gains.

HSBC believes the potential upside risks can offset the temporary economic disruptions from Typhoon Yagi. All in all, it maintains Vietnam GDP growth at 6.5% for both 2024 and 2025.

On inflation, price developments are turning more favourable in 2H24, 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, we maintain our inflation forecasts at 3.6% in 2024, well below the State Bank of Vietnam’s target ceiling of 4.5%. For 2025, HSBC keep its inflation forecast for Vietnam at 3.0%.

However, Typhoon Yagi has hit Vietnam particularly hard after making landfall on 7 September 2024. The government has reportedly estimated damage worth USD1.6bn with widespread flooding and damage across factories, warehouses, and power infrastructure. Although recovery efforts and a resumption of operations are under way, the after-effects of Asia’s strongest typhoon so far this year are expected to persist for weeks. Prime Minister Pham Minh Chinh has called for all efforts to restore livelihoods to achieve the government’s growth target of 7%, which is higher than that set by the National Assembly of 6-6.5% at the end of 2023.

In addition to global energy prices, in HSBC’s view, Vietnam is also vulnerable to food shocks. For instance, pork prices have been elevated as 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.

“Whether end-demand for goods improves further will be key in determining the strength of Vietnam’s recovery, as Western markets make up close to half of Vietnam’s exports. The trajectory and pace of consumer spending in the West will therefore need to be closely watched”, said HSBC.