Vietnam's GDP growth could rise from 5.1% last year to 6-6.5% in 2024, driven by a recovery in the country's exports which fell 4.4% in 2023 but could grow 7% in 2024, writes Michael Kokalari, chief economist of VinaCapital.
Vietnam's GDP growth could reach 6.5% in 2024 due to several factors.
Firstly, manufacturing output growth is likely to recover from less than 4% in 2023 to 8-9% in 2024, which is still below pre-Covid growth levels because of the weakening U.S and global economy. Most products manufactured in Vietnam are exported, especially to the U.S.
Secondly, interest rates in Vietnam will likely remain lower and less volatile than over the last two years, which will support the economy in a number of ways, including encouraging consumption and credit growth.
Thirdly, consumption is likely to see a modest acceleration, supported by the mentioned-above factors, although real retail sales growth is only likely to accelerate slightly in 2024, and most likely later in the year.
Further to that last point, Vietnam’s GDP growth fell from 8% during its post-Covid reopening boom in 2022 to 5.1% last year, a drop that was roughly equally attributable to plunges in industrial production/manufacturing and in the services sector/domestic consumption.
While we expect a healthy rebound in manufacturing activity, we do not expect a big increase in the growth of consumption. That’s because a surge in foreign tourist arrivals last year boosted consumption last year – which will not be repeated this year.
The number of tourists visiting Vietnam from countries other than China (which previously accounted for about one-third of total tourist arrivals) has almost fully recovered to pre-Covid levels. There is a possibility that Chinese tourist arrivals (which only reached 30% of pre-Covid levels last year) will continue to recover in 2024, but consumer sentiment in China currently languishes at similar levels as during the country’s Covid lockdowns as the country deals with a wide range of structural economic issues.
The main risk to our moderately positive outlook is the possibility of a “hard landing” in the U.S economy, causing demand for “Made in Vietnam” products to plunge. The value of the U.S dollar would likely soar in such a scenario (as it typically does) driven by “safe haven” buying, which would limit the ability of Vietnamese policy makers to respond to a slowing Vietnamese economy by slashing VND interest rates (Vietnamese policy makers have repeatedly shown their resolve to defend the value of the VND in recent years).
That said, the Vietnamese government would have ample ability to respond to such a crisis with massive fiscal stimulus, including a surge in infrastructure spending. In early 2023, the government guided its intention to increase infrastructure spending by about 50% to about $30 billion, or 7%/GDP last year, up from 4%/GDP in 2022.
It is very likely that part of the reason the government intended to ramp up infrastructure was to offset the predictable hit to the economy from the slowing global demand for “Made in Vietnam” products.
Early indications are that infrastructure spending increased to around $25 billion (or to 6% of 2023 GDP), and that the government plans a similar level ($25 billion) of spending this year. Critically, the government’s past prudence permits it to significantly ramp up spending if it wanted to.
Finally, the government implemented a few minor measures to boost the economy last year, including a temporary cut in the country’s VAT rate from 10% to 8% and a cut in the environmental tax on petrol; these measures probably only equated to total of about 0.5% of GDP, although a planned increase in public sector salaries next year will probably equate to another circa 1%/GDP of stimulus to the economy.
All of that said, we again believe the government could do much more to support the economy if it needed to.