Vietnam’s domestic consumption rebound driven by employment growth

One reason sentiment and spending started recovering in the middle of last year is that the employment picture started improving around that time, writes Michael Kokalari, chief economist of VinaCapital.

In 2023, consumer spending in Vietnam was depressed by layoffs in the manufacturing sector - which affected lower-income consumers - and by the country’s “frozen” real estate market - which affected middle- and upper-income consumers, although this weakness was largely offset by a surge in foreign tourist arrivals.

The number of foreign tourists visiting Vietnam leapt from 20% of pre-Covid levels in 2022 to 70% in 2023, accounting for most of the country’s 7.1% real retail sales growth last year.

Consequently, we estimate that the growth of spending by local Vietnamese consumers (excluding tourists) was nearly flat last year. That said, consumer spending and sentiment in Vietnam both bottomed in mid-2023.

In early-2023, highly publicized factory layoffs were a major drag on spending and sentiment, but the pace of layoffs slowed by mid-2023; the layoffs were a direct consequence of the drop in exports, which had also slowed by then, but by late-2023, firms resumed hiring workers.

Specifically, factories started expanding their workforces in October after laying off workers for most of the year, according to S&P Global’s PMI survey for Vietnam. Consequently, industrial employment expanded by nearly 1% month-on-month in October in 2023, according to the General Statistics Office (GSO), and by the end of the year industrial employment had fully recovered (it was essentially unchanged year-on-year).

That said, wages grew by less than 5% year-on-year, which is lower than Vietnam’s typical 7-10% year-on-year factory wage growth, reflecting weak conditions in the labor market.

Consumer sentiment and spending got a further boost in late-2023 from the nascent thawing of the country’s “frozen” real estate market. The highly publicized slowdown in Vietnam’s real estate market negatively impacted consumer sentiment to a degree that is out of proportion to the reality of the issues that the market actually faces. Consequently, a modest thawing could disproportionately boost consumer sentiment this year.

Other factors influencing consumption in Vietnam

The temporary surge of interest rates weighed on home prices, which in-turn dampened consumer sentiment, but lower mortgage interest rates/monthly payments will also free up money for homeowners to spend on purchases (mortgage rates in Vietnam are floating and linked to banks’ deposit rates).

That said, last year’s temporary spike in savings rates generated windfall income for savers - some of which got spent in the economy (a similar phenomenon helps explain the surprising strength of the US economy last year). Consequently, it is difficult to disentangle the impact of last year’s temporary surge in interest rates on consumption in Vietnam, although lower rates will make it easier for consumers to finance purchases of “big ticket” items which should support consumption this year (outstanding consumer loans growth was very weak in 2023).

Finally, the labour and real estate markets were not the only influences on consumer spending last year - we focused on these factors because they had the biggest impact. For example, the government’s temporary reduction to the VAT rate from 10% to 8% also supported spending, but we do not believe that cut was big enough to significantly influence consumer behaviour.

Domestic consumption growth should contribute to Vietnam’s GDP growth of 6-6.5% this year.

In the October edition of the East Asia and The Pacific Economic Update, the World Bank said Vietnam GDP growth could reach 5.5% in 2024. The figure is lower than the forecast of 6.5% for 2024 published in the April edition of the report, but unchanged from its “Taking Stock August 2023: Making Public Investment Work for Growth” report.

For 2024, Vietnam’s projected growth of 5.5% is higher than the region’s average of 4.5%. In comparison with regional peers, Vietnam’s figure is only lower than Cambodia with 6.1% and the Philippines with 5.8%.