Image Credits: Asian Insiders
Vietnam’s economic recovery is gaining traction as the Year of the Dragon unfolds, with a notable growth rate of 6.9% year-on-year in the second quarter, according to HSBC Vietnam economists. This growth marks a positive shift, especially as the recovery in the external sector expands beyond consumer electronics.
The manufacturing sector is rebounding strongly, showing resilience after last year’s difficulties. Purchasing Managers’ Index (PMI) data reveals five consecutive months of expansion, with industrial production notably improving in textiles and footwear. This resurgence has led to double-digit export growth, driven by broader market access for Vietnamese agricultural products.
However, the domestic sector’s recovery has been slower than anticipated, with retail sales still lagging behind pre-pandemic levels. To bolster domestic confidence, the government has introduced several supportive measures. Environmental tax cuts on fuel and reductions in value-added tax for specific goods and services are set to remain in effect until the end of 2024. Additionally, the revised Land Law, which took effect in August, is expected to enhance the outlook for the real estate sector. Early signs suggest that this legislation has already attracted foreign direct investment (FDI).
Economists believe that potential upside risks may offset the temporary disruptions caused by Typhoon Yagi, which recently impacted the region. Despite these challenges, Vietnam is projected to maintain a GDP growth rate of 6.5% for both 2024 and 2025.
Inflation trends appear more favorable in the latter half of 2024, with diminishing base effects from energy prices. An anticipated easing cycle by the Federal Reserve is expected to alleviate some exchange rate pressures, with inflation forecasted to stabilize at 3.6% in 2024, well below the State Bank of Vietnam’s target ceiling of 4.5%. For 2025, inflation is expected to decrease further to around 3.0%.
Despite these positive indicators, Vietnam faces challenges from recent natural disasters. Typhoon Yagi, which made landfall on September 7, has caused an estimated $3.3 billion in damages, impacting homes, factories, and infrastructure. Recovery efforts are underway, but the aftermath of this severe storm is expected to linger for weeks.
Prime Minister Phạm Minh Chính has emphasized the need for all efforts to restore livelihoods and achieve the government’s growth target of 7%, surpassing the National Assembly’s goal of 6-6.5%. The country also remains sensitive to fluctuations in global energy prices and food supply shocks, particularly in the pork market affected by African Swine Fever.
Ultimately, the strength of Vietnam’s recovery will hinge on consumer demand, particularly in Western markets, which account for nearly half of the country’s exports. The trajectory of consumer spending in these regions will be critical to watch in the coming months.