Vietnam: Vietnamese economy loses momentum at outset of year
The economy lost traction at the start of 2019, with GDP growth decelerating to 6.8% in Q1 over the same quarter of the previous year, down from the robust 7.3% expansion recorded in the fourth quarter of 2018.
The moderation in the first quarter came on the back of a broad-based loss of momentum across sectors. Notably, activity in the services sector weakened notably (Q1: +6.5% year-on-year; Q4: +7.6% yoy), dragged down by lower wholesale and retail trade, and softer accommodation and catering services activity. Growth in the agricultural, forestry, and fishing sector also slowed (Q1: +2.7% yoy; Q4: +3.9% yoy) on weakness across all subsectors. In contrast, growth in the industrial and construction sector remained strong (Q1: +8.6 yoy; Q4: +8.7 yoy). Manufacturing output—a key driver of growth—remained robust but was down from Q4, while construction activity also slowed in the quarter.
Turning to the external sector, exports of goods slowed significantly at the outset of the year (Q1: +4.7% yoy; Q4: +8.6% yoy), likely in part due to falling smartphone exports, as did exports of services (Q1: +5.7% yoy; Q4: +9.3% yoy), hampered by a drop in travel services. On the other hand, growth of goods imports was relatively stable in the quarter (Q1: +11.5% yoy; Q4: +11.2% yoy), while services imports growth eased (Q1: + 6.3% yoy; Q4: +8.4% yoy). Meanwhile, FDI continued to be a main driver of growth in the first quarter. Newly established enterprises increased at the fastest rate in five years in Q1, while newly licensed projects grew at a robust pace as well.
Growth is expected to cool slightly moving forward, as intensifying headwinds from a slower Chinese economy and lackluster global growth drag on Vietnam’s external-oriented sectors. Nevertheless, FDI should remain pivotal to growth in the year, while participation in free trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership should help open trade opportunities in new markets.
Commenting on the upside to the outlook, Noelan Arbis, an economist at HSBC, noted:
“There are also signs of strength for the overall economy. March PMI expanded at a faster pace from the previous month with manufacturing output and new export orders rising substantially. There is also a strong sense [of] optimism among local manufacturers based on an outlook of improved market demand and investments to expand their productive capacity (Nikkei, IHS Markit). Moreover, foreign direct investments (FDI) have risen substantially since the outset of the year, which should support domestic growth despite some external headwinds.”