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Vietnam’s resilient manufacturing sector continues to drive growth
Ngoc Thuy 21:32, 2019/07/03
During what has been a bumpy 2019, Vietnam has managed to weather through risks to growth relatively well.
Vietnam’s resilient manufacturing sector continues to drive exports and growth, making it stand out in a region where growth is on a downward trend, HSBC has said in its latest report. 

During what has been a bumpy 2019, Vietnam has managed to weather through risks to growth relatively well. At first glance, some headline numbers may not look rosy compared to previous quarters. Vietnam’s GDP in the second quarter gradually slowed to 6.6% year-on-year, driven by slower growth in the manufacturing sector of 9.4%. 

Manufacturing contribution to GDP fell below two percentage points for the first time in two years, dragging down economic growth slightly. However, Vietnam’s performance is not as bad as it looks in the broader context of a cooling tech cycle and subdued global demand. 

Exports rebounded strongly to 9.5% year-on-year from the 13-quarter low of 5.1% in the first quarter. In particular, electronics exports showed strong momentum, accelerating 15% in the second quarter from 1% in the previous ones – although this is partly explained by low base effects. 

In June, computer and phone-related shipments jumped to 17% year-on-year, the fastest pace in almost a year. Similarly, electronics imports grew 31% year-on-year, contributing 40% to overall imports growth. 

According to HSBC, this is likely a harbinger for a stronger electronics exports cycle to come, as a large part of electronics imports are components to be imbedded into final goods for export. 

But it’s not only manufacturing. Services, another pillar of growth, continued to expand steadily. It grew 6.9% year-on-year in the second quarter, thanks in part to a flourishing tourism industry.

It is therefore no surprise that tourism-related industries, such as retail sales, transportation, and accommodation services, continued to grow steadily, contributing to a more diversified growth outlook. Vietnam welcomed a record high of 15 million tourists in 2018, and by mid-2019, tourist arrivals are growing 7.5% year-on-year. 

The trend is likely to continue in the second half of 2019, especially as the northern hemisphere enters the winter season. It is expected services growth to remain robust for the rest of the year, bringing FX inflows and creating job opportunities. 

Ongoing inflation moderation 

Headline inflation in June further moderated to 2.2% year-on-year, from 2.9% in May. 

This marks not only the lowest year-on-year inflation growth since 2019, but the slowest pace in more than three years. On a sequential basis, prices fell 0.1% month-on-month, reversing the incremental increases over the past two consecutive months. The main drag came from lower transport prices, falling 1.7% month-on-month, primarily due to declining global oil prices. 

Meanwhile, housing and construction materials prices fell 0.2% month-on-month and food costs remained steady at 0.1%. 

In addition, healthcare prices were unchanged over the past half a year. Typically the government adjusts healthcare costs every six months, which means that an upward adjustment to healthcare costs could happen in July or August. In addition, given how well inflation has been contained, there could be more room for the government to continue its healthcare reform. 

Overall, Vietnam’s inflation has remained subdued with inflation growing at 2.6% year-on-year on average in the first six-month period. Although higher global food prices stemming from El Nino and recent retail electricity price hikes could pose upside risks, they are unlikely to pose imminent threats to the SBV’s inflation target of “below 4%” for the year.

It is expected that inflation to moderate to 2.7% in 2019, from 3.5% in 2018. Given benign inflationary pressures and solid economic growth, HSBC predicted the State Bank of Vietnam (SBV) will keep monetary policy on hold in 2019. 
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