Weak external demand slowed Vietnam's H1 GDP growth: UOB

Suan Teck Kin, UOB's Head of Research. Photo courtesy of UOB

The economic growth rates in the first half of 2023 have been disappointing not just in Vietnam but also in a number of regional countries, including China, Malaysia, and Singapore, according to Suan.

He said the main cause is weak external demand, which led to a slowdown in activities in the manufacturing sector, but fortunately domestic demand has been keeping pace and has helped to offset the slowdown in external demand.

UOB recently released an economic growth report for Vietnam in Q2.

Specifically, exports in Q2 fell 14.2% YoY, while imports fell 22.3% YoY. This is an extension from the first quarter of 2023, which saw exports contracting 11.9% YoY and imports declining.

In H1, exports have declined by more than 12% YoY, as there has not been a month of gains in exports since the end of 2022.

The General Statistics Office also reported that the country's main export earners, smartphones, saw their output fall 27.1% YoY in the second quarter to 39.8 million units, while garment output fell 2.9% and footwear output edged down 4.1% during the quarter.

On the domestic front, retail sales of goods and services in the first half of this year rose 10.9% YoY, while average consumer prices in the period rose 3.29%.

The pace of inflation has eased despite strong domestic demand. The consumer price index decelerated further, to 2.4% YoY in Q2 from 4.18% YoY in Q1, coming in below the government's target of 4.5%.

Core inflation, which excludes food, energy, and other public service prices, edged down to 4.48% YoY in Q2 from 5% in Q1, also providing room for the central bank to ease its policy stance in the first half.

"For an emerging economy like Vietnam, growth potential can be realized only when both the external and domestic demand sides of the economy are performing well," UOB's Head of Research emphasized.

Beside that, with current fluctuations in the exchange rate, inflation, and the U.S. Fed's continued raising of interest rates, Suan also pointed out the risks for domestic export industries.

He said that its reliance on markets in the developed world could be one of the causes.

"If these markets weaken or go into recession as central banks tighten policy even further, Vietnam's exporters will be greatly affected. As such, exporters need to think about diversifying their markets and products to spread the risk."

Outside UOB's office on Nguyen Hue Street, District 1, HCMC. Photo courtesy of UOB

The UOB's Head of Research also shared some predictions about the general economic situation of Vietnam in the second half of 2023.

According to Suan, external demand is likely to stay soft compared to other countries in the region. The situation can become more optimistic in the second half with the launch of new electronic products.

He also emphasized that the other key driver is for domestic demand to stay supported, and government spending and fiscal policy should be important factors to further support confidence.

In addition, the State Bank of Vietnam has continuously reduced interest rates. From UOB's perspective, Suan said that the lowering of interest rates is intended to make borrowing costs lower for companies to expand their businesses and investments and to lower inventory financing costs.

However, if the outlook remains uncertain and orders are not expected to rise significantly, there is less motivation to invest or build up inventory, so there may be limits to the lowering of interest rates. Fiscal policy will play a bigger role at this stage to boost domestic demand.

Besides, the long-term interest rate reduction might be enough to stimulate the economy. Theoretically, that should be the case, although a lack of demand may not respond sufficiently to lower interest rates.

"As such, the government may need to consider the acceleration of its spending, which has already been budgeted for, to increase demand," Suan said.