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Vietnam facing uncertain economic recovery

Vietnam facing uncertain economic recovery

Monday 18, 10 2021
If current barriers are removed, Vietnam’s GDP growth for 2021 may reach around 2-2.5%. Otherwise, it is likely that history will repeat itself in the fourth quarter and Vietnam will not only face an economic recession but also a more difficult and expensive recovery.

Production declining

While the economies of many developed countries in the world were recovering strongly, that of Vietnam reached the bottom of the economic crisis caused by the Covid-19 pandemic in the third quarter of 2021.

Economic growth in the first nine months of the year reached only 1.42% over the same period last year, the lowest since Vietnam published this statistics. However, to have a clear view about the devastation of the pandemic and the extreme measures to prevent the epidemic, one must look at the statistics of the third quarter, not the nine-month average. In the third quarter, Vietnam's GDP was estimated to decrease by 6.17% over the same period last year, of which the service sector decreased by 9.28%, the industry and construction sector decreased by 5.02%, only agriculture, forestry and fishery had a slight increase of 1.04%.

Economic growth

The Purchasing Managers' Index (PMI) has been far below neutral level (50) for the fourth month in a row. The number of newly registered enterprises has declined sharply and continuously in recent months.

According to the General Statistics Office, compared with the same period last year, in August newly established enterprises decreased by 57% in number, 76.5% in registered capital and 54.9% in number of employees. At the same time, the number of businesses dissolved and suspended operations was also at a high level.

Unofficial statistics from the representative agency of the Ministry of Labor, War Invalids and Social Affairs shows that hundreds of thousands of businesses and millions of employees in the South have had to stop operating, temporarily stop working, or work without pay.

Only one-third out of 18 million workers in 19 provinces and cities in the South had full jobs. Production costs (from petrol prices to basic production materials) have been accelerating and hundreds of thousands of workers have fled from the southern production centers, which signals a difficult economic recovery in the near future.

Prices are stable but not for long

The average consumer price index (CPI) in the third quarter of 2021 increased by 2.51% over the same period last year, which is quite low. However, the economy's general price index (dDeflator) increased by more than 23%, showing that the inflation pressure of the economy is very great. The increase in the price of raw materials, from several tens of percent to several times, along with logistics costs and social distancing measures, are causing production costs to rise.

CPI

Sooner or later, these production costs will be passed on to consumer prices once aggregate demand recovers. Besides, the disruption in the supply chains, and that farmers have a good harvest but are not able to sell products may cause them to reduce production, causing food prices to rise at the end of the year.

There is not much room for monetary policy. In addition to cost-push inflationary pressures, the risk of asset price bubbles is another barrier to monetary expansion in the near term. The consecutive decline in budget revenue (the revenue of the 2nd quarter was only 78% of the 1st quarter, the 3rd quarter was only 85% of the 2nd quarter) also hinders business support packages and the stability of people's livelihoods.

Uncertain economic recovery

In general, the health of the Vietnamese economy has declined very seriously. The negative growth rate of 6.17% in the third quarter may not fully reflect the disruption of production and goods circulation, the stagnation of business activities on a large scale, and the instability in lives of millions of workers. The resistance of businesses and people in areas with recent outbreaks of epidemics has approached the tipping point.

health of the Vietnamese economy

This shows that extreme anti-epidemic measures should not be continued anymore. Economic activities need to be "untied" to return to normal.

The transfer of orders out of Vietnam by some FDI enterprises or the departure from production centers by migrant workers may be temporary. However, without changing the anti-epidemic mindset, failing to ensure the continuity of production and circulation of goods based on reasonable and effective disease prevention and control measures, it is likely that the above problems will become permanent. Businesses will not expand investment, or workers will not return to the city until they are secure with future disease prevention and control measures.

The prospect of economic recovery therefore depends greatly on the strategy to deal with the pandemic in the coming time. However, Vietnam still lacks an overall and consistent guideline between localities and ministries on safety and flexibility. The epidemic has subsided, the vaccination rate has been quite high in major economic centers, but many businesses have not been able to return to normal activities.

In addition to changing effective pandemic response strategies, social security and fiscal support also play an important role in the recovery of the economy. Recent support packages are very limited. In the current context, Vietnam can temporarily accept a higher-than-normal budget deficit in order to secure the people and support businesses to resume production activities.

However, once the pandemic is over, fiscal discipline needs to be strictly adhered to again to avoid long-term public debt risks. It should also be noted that no matter how hard we try, the Government's support packages are still limited, incomparable to the needs of the economy. There is no other way but to let the economy save itself by resuming production and consumption activities.

Source: National Economics University

 

Categories
Vietnam Economy

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