The strong rebound seen in 2022 is unlikely to be sustainable, with overall growth momentum likely to moderate further in 2023. As a result, UOB has lowered Vietnam’s full-year GDP growth forecast for 2023 to 6 per cent from an earlier call of 6.6 per cent.
The call was due to the first quarter (Q1) of the year getting off to a slow start, likely hampering the total performance for the year. Vietnam’s real GDP growth in Q1/2023 decelerated to 3.32 per cent on-year, and from 5.92 per cent in Q2/2022, missing both the UOB and consensus forecasts.
The main cause for the weak performance was due to manufacturing, which dipped into negative territory with a 0.4 per cent decline, for the first contraction since Q3/2021. The sector undershot estimates considerably and saw the slowest pace of expansion since that 6 per cent fall over 18 months ago, when the economy was in a state of shutdown during the pandemic.
UOB said that the main cause for the manufacturing sector’s poor performance came primarily from weak external demand, which was largely expected. Exports in Q1 fell just under 12 per cent on-year to $79.2 billion, compared with an almost 13 per cent increase in the same quarter last year, while imports declined by over 14.5 per cent, resulting in a trade surplus of $4.1 billion for the quarter. This was the third consecutive quarter that saw a trade surplus.
Reflecting weak global demand on the back of tightened international monetary policies, exports to the US totalled $20.6 billion in Q1, for an almost 23.5 per cent on-year decline. Smartphones and garments, among the biggest export earners for Vietnam, posted a decline of 15 per cent and 17.5 per cent on-year to $13 billion and $7.2 billion respectively, according to the General Statistics Office (GSO).
Some signs of easing are evident regarding inflation, as Vietnam's consumer price index rose almost 4.2 per cent on-year in Q1, below the government’s target of 4.5 per cent. Inflation rose on the back of higher food, housing, and education costs. For the month of March, the consumer price index gained 3.35 per cent on-year but declined by almost a quarter of a per cent on-month, indicating a slowing trend for inflation. The GSO reported higher education costs saw a jump of over 10 per cent on-year during the quarter and continue to drive up living costs, contributing the most to annual inflation. This is followed by housing and construction materials, which increased almost 7.2 per cent on-year, with the cost of food and food services going up by 4.41 per cent.
Despite a drop of more than 11 per cent in fuel prices, core inflation (which excludes food, energy, and other public services prices) accelerated to just over 5 per cent on-year, compared to 4.75 per cent in Q4/2022 and 3.17 per cent in Q3/2022. This trend is likely to be of concern to the State Bank of Vietnam (SBV) as core inflation rose 4.88 per cent on-year in March, the 6th straight month that it hovered above 4.5 per cent.
Vietnam’s Q1/2023 GDP performance turned out to be far weaker than expected, largely due to weakening global demand, according to UOB. Domestic demand managed to hold up well, as shown by the decent pace of growth in the services sector.
Considering the latest economic performance, SBV is trying to strike a balance between economic growth and price stability, but UOB expects an increasing bias for the rate setter to shift towards a more accommodative stance in the future.
"With the US Fed poised to end its rate hike cycle as early as May and domestic inflation rates showing some tentative signs of easing, we maintain our view that SBV will cut its refinance rate sometime in Q2, to 5 per cent," said a UOB analyst. "For now, we think this could be a one-off move, and more rate cuts may be on the cards if domestic price pressures ease at a faster pace, although this is uncertain going by the latest inflation data."
Source: CCIPV / VIR