Vietnam’s economic recovery gaining momentum

Vietnam continues to benefit from its broad re-opening strategy, which saw a huge crowd flocking to tourist hotspots in the country and household spending rebound.

Vietnam's economic recovery is gaining momentum despite heightened global uncertainty related to the protracted war in Ukraine, higher commodity prices, and tightening global financial conditions, according to the World Bank.

Cargo handling at Dinh Vu port, Haiphong. Photo: Cong Hung

In its latest report, the World Bank pointed out the robust growth of industrial production by 9.4% in April, comparable to pre-pandemic rates.

Manufactures of apparel, footwear, electronics, electrical equipment, and metal products were the most dynamic sub-sectors, registering double-digit growth rates, it added.

However, machinery manufacturing slowed from 26.6% year-on-year in March to only 5.1% in April.

This deceleration was related to supply chain disruptions caused by lockdowns in China, which led to a sharp fall in machinery imports from this market in the last two months, stated the report.

The manufacturing PMI, meanwhile, stood at 51.7 in April, the same as in March, marking a seven-month expanding streak.

The economic recovery has also been reflected in strong domestic demand that helped boost retail sales.

According to the World Bank, retail sales growth accelerated from 10.4 % year-on-year in March to 12.1% in April as firming domestic demand was further buoyed by increased spending during two long national holidays and the return of foreign tourists.

"Except for the abnormally high growth in April 2021 due mostly to a low-base effect, this is the first time that retail sales have closed in on their pre-pandemic growth rates," noted the report.

This remarkable performance reflected both robust growth in sales of goods (up 12.4% year-on-year) and a strong rebound in consumer services, which grew 11% in April, almost double their growth rate in March.

The consumer services recovery was driven by booming sales of accommodation and catering services (up 14.8% year-on-year). About 101,000 international visitors arrived in April, the highest figure in two years.

Meanwhile, credit growth accelerated from 15.9% year-on-year in March to 16.4% in April, the highest rate since January 2018.

This acceleration could reflect stronger credit demand as consumers increased spending during two long national holidays and businesses ramped up production in anticipation of stronger consumer demand in the summer, it added.

Cautious about inflation

In light of Vietnam's positive economic performance, the World Bank stressed the necessity for the Government to be vigilant about inflation and risks to continued strong exports.

Both food and core inflation have continued to tick up, warranting close monitoring, it said. If inflation persists in the medium term, the economy should be allowed to adjust to higher prices with the authorities providing incentives for investments to increase productivity and aggregate supply.

Supply chain disruptions may continue to raise import prices and worsen the terms of trade, which already deteriorated significantly in the first quarter of 2022.

The US, EU, and China, the three largest trade partners to Vietnam, are expected to experience slower-than-anticipated growth in 2022, potentially affecting the country's export prospects.

Finally, given that China is Vietnam's second-largest export market and biggest source of imports, the full impact of lockdowns in China on Vietnam's manufacturing and exports will be felt in the coming months. This suggests that diversifying trade partners would be a prudent strategic consideration to mitigate risks and ensure continued export growth.

HSBC in its recent study noted Vietnam continues to benefit from its broad re-opening strategy, which saw a huge flock of tourists back to the country while household spending continued to rebound. According to Destination Insights with Google, Vietnam, along with the Philippines, are the only two Asian countries in the top 10 with the highest growth in demand for tourism in April. Tourists from Europe (19%), South Korea (14%), and the US (13%) accounted for half of the total tourist arrivals. While it is a positive step, the road to recovery will be a lengthy one. For one, the absence of Chinese tourists, who made up 30% of Vietnam's tourists in 2019, is the elephant in the room. Meanwhile, the competition in ASEAN is also fierce. After grand border re-openings in the region, countries, such as Singapore and Thailand, have pushed for easing travel procedures by scrapping testing requirements. Outside of tourism, domestic demand is also set on a strong footing, thanks to the easing of local restrictions. After a small pull-back in the first quarter of this year, mobility has finally exceeded pre-pandemic levels since early April. The improvement has undoubtedly led to a continued recovery in retail sales, rising 5.8% year on year in April. Not only were goods up by 2% month-on-month, but more importantly, services- and tourism-related spending were up by 7%, signaling a rosy start to services recovery.