World Bank reduces Vietnam growth forecast sharply

It said in its latest report: "The near-term outlook remains favorable but subject to risks. Domestic demand is expected to be affected by higher estimated inflation (4.5% average) in 2023, which may erode household purchasing power. Rising interest rates may weigh on private investment."

The global situation would continue to weigh on the Vietnamese economy, with growth projected to decelerate to 1.7% this year, the third weakest pace in nearly three decades.

This reflects simultaneous policy tightening to contain high inflation, worsening financial conditions and the continued effects of the war in Ukraine.

Weaker than expected growth in Vietnam’s major export markets like the U.S., China, and the Eurozone could affect export prospects.

Persistent inflation in the US and the eurozone could lead to tighter financial conditions, affecting Vietnam’s financial sector.

Domestically, persistent price increases could cause inflation expectations to rise, feeding into destabilizing pressures on nominal wages and production costs and affecting demand.

Improving the services sector is a key solution for economic growth as productivity in this area remains lower than in regional countries.

The services sector labor productivity (measured by value added per worker) was US$5,000 in constant dollars in 2019, far lower than that of Malaysia ($20,900), the Philippines ($9,300) and Indonesia ($7,300).

Vietnamese manufacturing businesses are relatively limited in their use of services—the value of services as domestic inputs is only 14% with a mere 1.6% of manufacturing firms using global innovator services such as information and communications technology, professional and financial services.

The country should reduce restrictions on services trade and foreign investment, encourage technology adoption and upskill labor, the bank added.