Domestic demand fuels Vietnam growth amid external woes: HSBC

Booming domestic demand has been supporting Vietnam's economic growth amid global trade slowdown, HSBC said in its December report.

In its “Vietnam at a glance: Intensifying external woes” report, the bank said retail sales continued to reflect the continued re-opening effects, rising 17% year-on-year in November.

Besides, the labor market recovery in the tourism sector is still underway. Vietnam welcomed around 600,000 foreign tourists in November, bringing the 11-month number to three million, or 16% of pre-pandemic level in 2019. Despite a lack of mainland Chinese tourists, Vietnam has been proactively tapping new markets like India.

However, rising inflation is a concern. In November, headline inflation rose 0.4% after a month, translating into 4.4% year-on-year, according to HSBC data. In particular, core inflation reached almost 5% year-on-year, reflecting an accelerated recovery in domestic demand.

Vietnam faced an energy shortage, putting upside pressure on headline inflation. Besides, the rise in input material costs has been broad-based. Coupled with unfavorable base effects, the lender expects inflation pressures to stay elevated in the coming quarters, prompting the central bank to keep its foot on the monetary brakes.

Intensifying external woes

After over two years of booming trade, a decline has come. Global orders have been falling sharply, taking a toll on Asian exporters, including Vietnam. The country has been on the front line in terms of feeling the pain.

In November, Vietnam saw the first meaningful year-on-year decline in its exports in two years, with broad-based weakness. In particular, shipments of electronics and textiles/footwear, two main export pillars of Vietnam, was dragged down by the cooling demand in the West.

Since the advent of the U.S.-China trade tensions, Vietnam has been one of the biggest beneficiaries in terms of both trade and FDI diversion, boosting its export share in the U.S. market. As a result, the country has become increasingly vulnerable to a U.S. economic slowdown. For example, exports of machinery-equipment, wood products, footwear, and textiles have started to turn south.