Vietnamese economy need monitoring after slowdown in Q1: WB

WB statistics show Vietnam’s GDP grew by 3.3% year on year in the first quarter of the year, slowing down from 5.9% in the fourth quarter of last year.

This marks the second lowest quarterly growth rate over the past decade, and WB experts pointed out that the slowdown can be attributed to a contraction of industry, reflecting the sharp decline in exports.

The service sector remained the main contributor to growth, contributing 2.9% in Q1 thanks to strong domestic demand coupled with the return of international visitors.

Agriculture registered a 2.5% growth rate and contributed 0.3% to the GDP rate in Q1.

Despite the overall contraction, industrial production showed tentative signs of improvement in March.

The industrial production index (IPI) stood at 1.6% lower in Q1 compared to the same period last year. However, the IPI improved in March, growing by 9.4% month-on-month compared to a steep contraction of 22.7% seen in January and a weak growth of 3.5% recorded in February.

Meanwhile, exports and imports declined by 11.8% and 14.6% year on year, respectively, reflecting the fall in exports in several major sub-sectors, including electronics, machinery, textiles, apparel, and footwear products, as well as their associated imported inputs.

Both headline and core inflation continued to be slow in March, reaching 3.4% and 4.9% year on year, respectively. Inflation continued to be driven by prices of food and foodstuffs, housing, and construction materials, while transport was no longer the major contributor to inflation compared to March 2022.

Most notably, the FDI commitments continued to trend down in Q1, representing a fall of 40% on-year amid high uncertainty at a global level, reflecting the effects of uncertainty related to the global economic prospects as well as the tightening of financial conditions in advanced economies.

The report outlined that the disbursement of FDI also started to slow in Q1, while credit growth decelerated to 9.5%, the lowest level since 2020, reflecting the slowdown in economic activity, especially in terms of industry and real estate sectors.

To support the economy, the State Bank of Vietnam (SBV) reduced its policy rates twice in March, inducing reductions in commercial banks’ deposit and lending rates. The budget was in surplus during Q1-2023, with total revenue increasing by 1.3% year on year while nominal total expenditure increased by 7.2% annually.

According to WB economists, if weaknesses in external and domestic demand persist, the Government could consider supporting aggregate demand through an acceleration of public investment disbursement.

They pointed out that anticipated increases in electricity tariff and public sector salary over the coming months and the easing of monetary policy by the SBV may lead to renewed upward pressure on inflation.

Moreover, further financial tightening occurring in the United States to control inflation could create exchange rate pressures, especially as the SBV recently reduced some policy interest rates in a bid to support its economy.

Think-tanks emphasised that close supervision of the financial sector is critical given continued uncertainties in global financial markets and a slowing domestic economy, including a sluggish real estate sector that constitutes roughly 20% of financial sector borrowing.