HSBC: Low Q1 growth no cause for concern

Bank's latest report notes mitigating factors behind growth slowdown in first quarter.

In its latest report on Vietnam economic outlook, HSBC believes the low GDP growth during the first quarter of this year is only a minor setback and that the manufacturing sector has the potential to lift growth in the coming quarters.

Vietnam’s economic growth slowed to a three-year low of 5.1 per cent year-on-year in the opening quarter of the year. Amid a slowdown across the board, the drag from mining and quarrying worsened during the quarter due to a combination of a recent fall in coal prices, a higher natural resources tax (which was implemented on July 1, 2016), declining output from mature oil fields, and higher production costs due to the depletion of coal layers.

Although mining and quarrying has been ailing for some time now, the recent fall in coal prices intensified the drag from the sector. Coal layers, which are easier to access, are increasingly becoming depleted, raising the cost of extraction. Until recently, robust manufacturing masked these shortcomings.

Manufacturing growth also stumbled in the quarter, as a leading phone maker stalled production, dragging down electronics production at large. A decline in Samsung’s output in Vietnam contributed to a 10.7 per cent contraction in exports of phones and components, dragging down electronics production. According to the General Statistics Office (GSO), shipments of phones and components - the country’s largest export revenue earner - were down 24.3 per cent year-on-year in March.

Nevertheless, HSBC expects exports to rebound soon, helped by new product launches and a gradual revival of global demand, which is reflected in the sustained increase in overseas orders in Purchasing Managers’ Index (PMI) surveys. Operating conditions in the manufacturing sector continued to improve through March. At 54.6, the headline PMI was slightly higher than February’s 54.2 and the strongest since May 2015.

Output and new export orders accelerated during the month, while overall new orders grew at a slightly slower pace. Higher workloads led to the fastest gain in employment since September 2016. Backlogs of work continued to expand, albeit at a slower pace. Additionally, manufacturers remained strongly confident that output will increase over the coming 12 months, thanks to expectations of higher new orders and business expansion plans.

On the price front, gains in input prices quickened to their sharpest pace in almost six years amid higher prices for oil and other raw materials and currency weaknesses. However, higher input costs were passed on to clients, only partly, as charge inflation (increases in output prices) rose at a slower pace, implying a squeeze in margins. This is reflected in the future output index, which, although still at a high level, receded slightly from its peak in February.

Elsewhere in the economy, inflation is gradually easing, even in the face of higher energy prices and increased costs of healthcare and education, owing to muted food inflation. Headline inflation eased further, to 4.6 per cent year-on-year in March from 5.0 per cent previously. About half of the increase came from higher costs in healthcare services, owing to the government’s scheduled hike of medical and educational service fees.

The transport component, which had been in deflation for over two years until December 2016, grew by 14.6 per cent year-on-year in March due to higher energy prices. Meanwhile, core inflation rose only a touch, to 1.6 per cent year-on-year from 1.5 per cent previously. Despite higher costs for energy, healthcare and education, low food inflation is keeping price pressures in check.

Overall, HSBC believes the GDP result highlights the economy’s sensitivity to manufacturing cycles, especially high technology. “For Vietnam to broaden growth drivers and, as such, help reduce the volatility of economic output, further reforms would help, especially with regard to State-owned enterprises’ efficiency and the creation of fiscal buffers,” the report stated.

by Duy Anh / VET