A positive outlook for Vietnam's consumer spending in 2024 is driven by strong economic growth translating into increased disposable incomes, with the effects of the pandemic gradually fading, according to Fitch Solutions.

Consumers at Big C Supermarket in Hanoi. Photo: The Hanoi Times

Under its latest report, household spending in real terms is projected to surge by 7.1% year on year, reaching VND3,470.7 trillion or US$143 billion (2010 prices) in 2024. This surpasses the pre-Covid levels recorded in 2019, which stood at VND2,770 trillion ($113.6 billion). Fitch Solutions highlights that this growth mirrors a return to the stable trajectory observed before the pandemic, averaging around 6.6% during the 2015-2019 period.

Moreover, the forecasted strong growth is attributed to a combination of factors, including easing inflation and a tight labor market. These conditions are expected to bolster spending, with real wage growth remaining steady and supporting purchasing power throughout the year, as per Fitch Solutions' analysis.

Retail sales growth remains stable

The latest available data shows that retail sales growth registered 9.3% year-on-year in December 2023, significantly lower than the 20.0% recorded at the beginning of the year, mainly due to base effects after the Covid-19 pandemic. The 14 consecutive months of double-digit growth in retail sales came to an end in May 2023 as economic growth sharply declined. Nevertheless, the December 2023 retail sales figure marks the 25th straight month of retail sales growth.

In 2024, Fitch Solutions expects that retail sales growth will remain stable, supported by the broader economic outlook. Fitch Solutions also adds that the outlook for consumer spending in Vietnam in 2024 aligns with its Country Risk team's forecast that the domestic economy will grow at a real rate of 5.5% year-on-year, an improvement from the 4.7% year-on-year in 2023. Meanwhile, the Vietnamese dong is expected to depreciate against the US dollar, weakening from VND23,800/USD in 2023 to VND24,350/USD in 2024.

“Vietnam remains heavily reliant on imports to meet local demand, and this depreciation will provide headwinds to consumer spending growth as imports become more expensive. However, robust economic activity will stimulate private consumption, supported by a very low and stable unemployment rate,” stated Fitch Solutions.

The recovery of the tourism sector, especially as China has reopened for travel, is expected to provide some offset. "We believe this backdrop means that consumer spending over 2024 will remain stable," it said.

In Vietnam, inflation has been trending upward as domestic economic activity drives up imports and the depreciatory trend of the dong continues, impacting the price of imports. The latest reading, at 3.6% year-on-year in December 2023, is lower than the average of 4.5% inflation that Fitch Solutions forecasts for 2024, suggesting that price inflation will persist throughout the year but remains on track to end the year at 4.0% year-on-year. "Overall, while elevated inflation is a risk to the outlook, we do not believe that it poses serious risks to consumer spending, particularly given that economic growth will be robust. The risk is that inflation rises and remains elevated at those levels for longer than anticipated, which will accelerate the erosion of household purchasing power," stated Fitch Solutions.

Employment outlook

Several markets have witnessed robust labor market dynamics following the Covid-19 pandemic, driven by swift local and global economic recoveries. Governments have actively supported their local labor markets, resulting in tightening conditions that have led to an increase in nominal wages. Despite inflation eroding real income gains, the vigorous labor market played a pivotal role in propelling consumer spending growth throughout 2022 and 2023.

However, with major markets and economies anticipated to slow in 2024, Fitch Solutions predicts a rise in unemployment rates across the board. The diminishing levels of personal savings, which previously supported current consumption patterns, will necessitate households to adjust their purchasing habits and curtail spending, according to Fitch Solutions. It emphasized, "Rising unemployment is, therefore, a key risk to our consumer outlook for 2024."

In the case of Vietnam, the unemployment rate (as a percentage of the total labor force) stood at 2.26% in the fourth quarter of 2023, marking a decrease from 2.30% in the first quarter of that year. Fitch Solutions projects that in 2024, unemployment will average 2.1% as the expanding economy stimulates job creation. The tightening labor market is expected to enhance workers' wage prospects, providing crucial support for consumer spending.

"This strong labor market is a key element of our positive consumer outlook for Vietnam in 2024," it concluded.