Research Center

Vietnam’s economy is foreseeing a clear path into contraction under the impact of Delta’s outbreak. Production is put into a puzzle with the “three on the spot” requirement with most industries running far below full capacity, while domestic spending has come to a standstill aside from essential purchases during a lockdown. Furthermore, a risk of export orders shifting to competitors is becoming inevitable if a broken supply chain is not fixed. A key solution for all is when the government opens the re-opening stage.

Vietnam’s fast-growing economy is reversing towards contraction territory shortly after 2 months of Delta’s variant impact. A long period of growth in export and industrial sectors has abruptly ended in August, while the services sector is almost completely locked down with current mobility restrictions. Whether it is a temporary disruption or a potential recession depends on an answer of when the government brings the outbreak under control.

The ongoing Delta outbreak makes Vietnam's economic picture more gloomy, as both domestic and export demand are under its severe impact. The retailing sector is partly disrupted due to current strict social-distancing curbs, while trade recovery is facing more uncertainties with several export markets also being hit by the Delta variant. From our view, economic conditions will become more and more worsening if the economy keeps staying in lockdown.

The current domestic economic outlook becomes gloomy when the government applies stricter measures to deal with the current outbreak. Domestic consumption retreated further under a short-term disruption in the services sector, and CPI became more volatile due to the temporary shortage of essential goods. Export demand is among a few drivers for economic growth in this quarter with our expectation of successful re-opening the economies from our major trading partners. The industrial sector is also in expansion territory thanks to strong growths in export demand-driven industries.

Economic growth in the second quarter, thanks to a low-base effect from last year, is considered a key driver for an ambitious growth target in 2021. However, a scenario of a 2Q21’s high-growth performance has been cast aside with the COVID-19 resurgence. The services area is getting the hardest hit this time with strictly social-distancing measures, while the industrial sector faces short-term disruptions in some key industries. Besides, an external driver like export is also slowing down in 2Q21. Looking ahead, a rough start for the rest of 2021 is just beginning.

COVID-19 will be a great challenge for Vietnam's economic activity in the near term. IIP and retail sales would be the first to see pandemic-caused disruption, while the mobility restrictions also placed a burden on FDI activity. However, we expect export demand to continue to be life-saving for economic growth in 2Q21, as the U.S. and European consumer confidence remain positive thanks to the accelerating vaccination rollouts.

The macroeconomic conditions in May become less favorable than in April due to the ongoing outbreak and a global shock of surging commodity prices. Stricter mobility restrictions put heavy pressure on FDI and retail sales performance this month. On the other side, surging global commodity prices are considered the main factor in lifting inflation in May. Furthermore, the trade balance recorded the second consecutive deficit, attributable to the rising import price. However, a modest recovery in the industrial sector somewhat lightens the macroeconomic picture under many internal and external uncertainties.

April provides more evidence for the economic recovery in recent months as major economic indicators improve further. However, we predict the economy to face more challenges in the coming months stemming from an uneven global economic recovery and the new COVID19 resurgence within the country. More prominently, the inflationary pressure is piling up when the upward momentums of construction materials and petroleum products prices see no sign of reverse.

The economic condition continued going more favorable in April as production, trade, and consumption activities recover further compared to the same period last year. Besides, CPI upward pressure became softer this month when the uptrend in world commodity prices become less aggressive. Hence, we indicate that the macroeconomic conditions generally remain stable in this month.