Vietnam's Economy Expands, but Supply Chain, Inflation Pose Challenges
Vietnam’s economy expanded in Q1 2022 showing the country is open for businesses and visitors, however, challenges remain due to labor shortages, disruption to supply chains, and inflation. Vietnam Briefing looks at what is contributing to Vietnam’s growth and how it has fared in the early part of the year.
The General Statistics Office (GSO) released economic figures and cited that Vietnam’s economy in Q1 2022 (January-March) expanded by 5.03 percent compared with the same period as last year. The growth however was down from 5.22 percent in Q4 2021. Nevertheless, the government agency further stated that Vietnam is on track for economic recovery.
Q1’s GDP structure was dominated by services at 41.70 percent followed by, industry and construction and 37.97 percent, and agriculture, forestry, and fishery at 10.94 percent.
Total retail sales of consumer goods increased by 4.4 percent year on year though passenger transport was down.
Vietnam’s exports stood at US$88.58 billion while imports were recorded at US$87.77 billion.
As with previous years, The US remains Vietnam’s largest export market at US$25.2 billion of products.
Vietnam’s exports and imports rose to US$176 billion in Q1 a year-on-year rise of 14.4 percent.
In terms of FDI, disbursement stood at US$4.42 billion an increase of 7.8 percent compared with the same period last year. As with previous trends, Singapore led the list followed by South Korea, Denmark, and China. In addition, Binh Duong province led the list with total registered investment capital. This is due to the Lego Group project by Danish investors in Binh Duong estimated at US$1.3 billion.
Economy heats up but external headwinds stall growth
Vietnam opened up its economy last year following stringent pandemic restrictions. It further reopened borders and allowed international flights this year allowing experts and tourists to visit the country. Despite a high number of cases previously, a high vaccine rollout has kept serious illness and deaths low, allowing factories to remain open.
However, while Vietnam’s economy is in full swing and traffic in major cities to almost pre-pandemic levels, external factors threaten to disrupt this growth.
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Vietnam, like many other countries, is suffering from higher oil prices, tight coal supplies, inflation, effects of the Russia-Ukraine conflict, and lockdowns in China. Citing these factors, the World Bank has projected that Vietnam’s GDP growth to a modest 5.5 percent.
Inflation is likely to be further exacerbated due to increasing oil prices. Steel and oil are reporting the highest increases with up to 80 to 90 percent increases as per Juki Vietnam – a subsidiary of Juki US. Nevertheless, the government has reassured to keep inflation in check at around 4 percent this year.
Being a manufacturing hub, Vietnam is highly dependent on raw inputs that it sources from China and other countries. But with China enduring lockdowns with minimal movement at its ports such as in Shanghai, it has become more challenging to source input raw materials. Further, while some businesses have attempted to diversify their inputs, high freight rates have put a strain on their finances, while a shortage of containers persists. As per the Vietnam Logistics Association, average prices for shipping containers from Vietnam to the US east coast have surged by three times to approximately US$16,300.
Lockdowns in China are likely to have further downstream effects for not only Vietnam but global supply chains. Freight in Shanghai is piling up as its ports and airports operate at limited capacity. Vietnam, being a manufacturing hub, is already reporting a shortage of Chinese components. In addition, once lockdowns are lifted cargo volume is expected to exceed handling capacity at ports and airports causing further logjams.
IHS Markit stated that input costs have increased at the fastest rate in eleven years with business confidence falling.
As we see in the above infographic, Vietnam’s PMI increased consecutively since October 2021 when lockdowns were lifted but experienced its first slowdown in March this year due to the latest wave of positive cases resulting in a shortage of labor and inflation headwinds.
Labor shortages have also hampered production. While factories remain open, workers that test positive for COVID-19 have to isolate resulting in shortages. Suppliers that supply Nike and Adidas stated that around 40 percent of staff had COVID-19 at some point. In addition, workers that returned home once restrictions were lifted have not returned from their hometowns. As per the GSO, 441,100 workers were added to the labor force in Q1 but is not enough. Factories have reported that while orders have increased, recruiting is a major challenge hampering production.
The government has also warned of further shocks to supplies due to the Russia-Ukraine conflict. Logistic bottlenecks have slowed down average shipping times, particularly for those engaging in long-route logistics. Several shipping companies such as Maersk have also announced that they have suspended non-essential.
Nevertheless, the global supply chain crisis underscores the need for companies to diversify their supply chains in order to mitigate against force majeures and geopolitical risks. The Russia-Ukraine conflict is only the latest example of this; the disruption of the COVID-19 pandemic and volatility in global markets due to US-China tariff escalation are other recent examples.
Vietnam has introduced some measures to alleviate the impact of price hikes such as a cut in gasoline prices, however, the World Bank notes that a targeted approach is needed to help build resilience to future shocks. It adds that further structural reforms may be necessary to ease doing business, save on logistic costs, and equipping the workforce with appropriate skills.
Vietnam’s economy has managed to remain unscathed, but challenges remain. Most risks stem from external factors as discussed earlier, but the government will need to implement policies that buffer some of these effects. Further, a proposed wage hike in July may further increase challenges for businesses in Vietnam. Nevertheless, businesses remain optimistic that production will increase over the coming year based on new orders. Indeed EU businesses remain confident; as per the Business Climate Index (BCI) by EuroCham, the index rose to 73 points the highest since the fourth wave of the pandemic showing that businesses executives are upbeat as Vietnam opens up.