Vietnam to grow 5.85-6%, may miss official target: think tank

Vietnam’s GDP will grow by between 5.85% and 6.01% this year and could miss the government’s target of 6-6.5%, researchers with a leading think tank have forecast.

After a 5.66% expansion in Q1/2024, the fastest Q1 pace in the 2020-2024 period, the economy is set to grow 6% in Q2 for a first half growth of 5.8%, the Vietnam Institute for Economic and Policy Research (VEPR) says in its annual economic report released Thursday.

The VEPR, under the University of Economics and Business of the Vietnam National University-Hanoi, has put out its annual report for 16 years with funding from Germany’s Friedrich Naumann Foundation.

The researchers note that recovery of various economic sectors, especially domestic consumption, has remained slow and uneven this year. In the first five months this year, retail sales and consumer services revenue increased 5.2% year-on-year, excluding the price factor, below a 9.3% increase in the same period last year.

Meanwhile, Vietnam’s exports and imports showed robust improvement in H1/2024. Government data shows that exports increased 15.2% year-on-year to $156.77 billion in the first five months of the year, while imports went up 18.2% to reach $148.76 billion.

A H1 recovery in aggregate supply has supported GDP growth, with the index of industrial production rising 6.8% year-on-year between January and May, the report says.

It predicts Vietnam’s growth at 5.85% in a baseline scenario, higher than the 2023 performance of 5.05%.

Report authors assume that the Vietnamese dong would depreciate by 5-6% this year, disbursement of public investment will meet the yearly target, and foreign direct investment (FDI) inflow will see no drastic changes in H2/2024.

They say that such a scenario will be feasible only if the balance of payments records a surplus of at least $21 billion, private sector investment (FDI and domestic companies) rises 12%, and private sector consumption goes up 4.2%.

With a policy adjustment scenario, they project Vietnam’s GDP growth at 6.01%. This is conditional on a narrower interest rate gap between the VND and strong foreign currencies; net export component of $24 billion; better growth in public and private investment; and inflation curbed at 5%.

They also noted that in both scenarios, the economy would be operating below its potential.

Given this, they feel that a growth target of 6.5%, the upper limit set by the government, could prove unreachable this year, given contraction in the public sector, weak domestic and international affecting private sector spending and export growth and increased exchange rate risks in H2/2024 driven by inflation risks and reduced private sector investment incentives.

The VEPR report’s projections are in line with the latest 2024 growth forecasts by international institutions at 5.0-6.5%.

After ending 2023 below the regulatory ceiling, inflation has been under high upward pressure since the outset of this year. The report expects Q2 and H1 inflation at 4.5% and 4.1% year-on-year, respectively.

In its macro update released Wednesday, the World Bank also highlighted consumer demand remaining weak despite a sequential improvement in retail sales in May.

“While external demand is showing signs of recovery, the performance of domestic demand, especially domestic consumption, is showing mixed signs,” the note said.

Given the strong U.S. dollar, reduction of interest rates to support investment could intensify the pressure on the exchange rate, the World Bank said, suggesting continued support of aggregate demand through capital expenditures.