February inflation strikes historic five year low

The latest HSBC report shows that other than spending on food and eating out, most Vietnamese have cut back on non-essential purchases such as garments and household items.

HSBC adjusted its forecast for inflation to 7.3% in 2014 on the back of weaker than expected domestic demand, low rice prices, and subdued commodity prices.

This means the central bank has ample room to maneuver and keep the open market operations (OMO) interest rates rate on hold, the HSBC report states.

The weaker-than-expected February inflation data also suggests that economic activity continues to be dragged down by weak consumer confidence.

HSBC predicted core inflation (stripping out food and fuel prices) to decelerate further if the economy continues to perform below expectations.

While the GDP accelerated to 6.0% year on year Q4 of 2013, domestic conditions in Vietnam continue to be weak, dragged down by a large overhang of debt and sluggish pace of reform in the financial sector.

New investment in electronics and manufacturing has helped to offset slowing domestic investment, however, FDI inflows are not sufficient enough to overcome the slack in the domestic economy, the report said.

The concern is that should investment and spending continue to underperform, further damage will be inflicted on the economy, bearing detrimental long-term consequences.

Demand for semi-skilled workers is rising due to higher foreign investment but labour demand from small-and-medium enterprises remains weak, the report concluded.