Vietnam: Economic growth disappoints in Q1
March 30, 2017
Vietnam started this year on a weak footing. Economic growth decelerated for the second consecutive quarter and came in at 5.1%, significantly below the rate observed in the preceding quarter (Q4: +6.7% year-on-year) and the expansion observed in the same quarter of the previous year (Q1: +5.5% yoy). The reading also vastly undershot market expectations of a strong 6.5% increase and marked the weakest expansion since Q1 2014. The government faces an uphill challenge to achieve its yearly GDP target of 6.8% this year.
The economic slowdown reflects a deceleration in the secondary and tertiary sectors, which more than offset a soft expansion in the primary sector. Growth in the industrial sector decelerated from a 7.0% expansion in Q4 to a 4.2% increase. Industrial output was dragged by a sharp 10.0% contraction in mining and quarrying and weaker expansions in the remaining four components. The mining industry, whose output has declined for five consecutive quarters, was particularly hard-hit by the introduction of a new tax on natural resources and declining output from mature oil fields. Growth in the manufacturing component decelerated owing to disruption in smartphones supply chains. The decision to cancel production of the Samsung Galaxy Note 7 smartphone sent ripples across the economy as the country accounts for over 22% of the company’s exports. This shock was partly behind the deterioration of the trade balance, which posted a USD 2.0 billion windfall in Q1, starkly contrasting the USD 1.2 billion surplus observed in Q1 2016.
The primary sector accelerated modestly on the back of a recovery in the agricultural and fishing sectors (Q4: +1.4% yoy; Q1: +2.0% yoy). The reading marked the third consecutive acceleration, though adverse meteorological conditions continue to stifle growth prospects. The country’s services sector, which constitutes over 60% of the economy, expanded strongly, albeit at a slower pace (Q4: +6.9% yoy; Q1: +6.5% yoy). This suggests that Q1’s slowdown mostly reflected weakness in the secondary sector rather than growing weakness in the economy as a whole.
Economic activity is set to shift into higher gear in the coming quarters, buttressed by strength in the services sector. Ongoing measures to attract tourism should bear fruit and consolidate Vietnam as a tourist hotspot. Investment prospects are high since reforms underway to liberalize state-owned enterprises have improved the business climate. Likewise, the positive spillover of healthy FDI inflows into the economy will be felt in the manufacturing and construction sectors as new foreign-invested factories open. This, coupled with optimistic growth prospects for Vietnam’s main trading partners, suggests that the economy will be able to overcome the weakness experienced in Q1 and remain one of the most dynamic in Southeast Asia.