Easing external demand to weigh on Vietnamese manufacturing sector’s growth

July 04, 2019 - 10:28

Slowing global demand will have adverse impacts on Việt Nam’s manufacturing growth in the remaining months of the year, experts forecast.



Thu Hà

HÀ NỘI – Slowing global demand will have adverse impacts on Việt Nam’s manufacturing growth in the remaining months of the year, experts forecast.

Reports from the General Statistics Office (GSO) showed the growth rate of the processing and manufacturing sector slowed to 11.18 per cent in the first half of the year, from the 12.7 per cent in H1 2018.

Analysts from Fitch Solutions forecast the slowdown would continue in the second half of the year due to easing external demand.

“We maintain our view that slowing external demand on the back of slowing global growth will weigh on Việt Nam’s industrial activity, particularly for the manufacturing sector, over the remainder of 2019, although we still expect manufacturing to be the largest contributor to growth,” the analysts told Việt Nam News.

According to Fitch, global growth is expected to slow to 2.9 per cent in 2019, from 3.2 per cent in 2018, which would drag on demand for Việt Nam’s electronics exports. The products currently account for 40 per cent of the country’s total exports.

In fact, a cutback in gross fixed capital formation (GFCF) in economies downstream in the global electronics supply chain has been seen. For example, facility investment in South Korea fell by 16.1 per cent year-on-year in the first quarter of 2019, which suggests a pessimistic business outlook among South Korean businesses. Additionally, fixed capital formation in India slowed to 3.6 per cent year-on-year in the quarter ending March 2019, from 11.7 per cent year-on-year in the December 2018 quarter.

“Given Việt Nam’s position upstream in the global electronics supply chain, we believe that this trend bodes poorly for Việt Nam’s export growth outlook over the near term,” Fitch analysts said, adding slowing eurozone growth, forecast to come in at 1.6 per cent in 2019 from 2.1 per cent in 2018, would also weigh on demand for Việt Nam’s exports to the EU, which constitute 17 per cent of the country’s total exports.

GSO Director General Nguyễn Bích Lâm told a conference last week that export turnover of some key export staples has been under downtrend and could not maintain the growth momentum in the second half of this year.

Lâm was concerned that in the second half of 2019, it would be difficult for the processing and manufacturing industry to retain the growth rate as in the same period last year.

Experts said easing external demand, together with unfavourable base effects over the remainder of 2019, would weigh on Việt Nam’s growth, particularly in the final quarter. Fitch forecast Việt Nam’s real GDP growth to come in at 6.5 per cent this year, down from 7.1 per cent in 2018.

Positive signs

Despite some drag from manufacturing, experts also pointed out construction and services growth should remain resilient and provide some support to Việt Nam’s overall growth.

“Strong foreign direct investment (FDI) in real estate businesses over 2018 as well as over the first five months of 2019 inform our view for construction activity to remain robust over the coming quarters,” Fitch analysts said.

Fitch also expects the country’s services sector to receive support from an improvement in the labour market and strong foreign investment.

The GSO’s labour market data showed a decline in youth (15-24 years old) urban unemployment to 9.8 per cent in the second quarter of 2019 from 10.6 per cent in the previous quarter, despite overall urban unemployment remaining stable at 3.1 per cent. Over the same period, urban underemployment rose to 0.95 per cent from 0.60 per cent.

These figures suggest insufficient job creation in areas which urban youths are skilled in, and this is prompting these individuals to seek out employment which does not adequately leverage their skillsets.

However, experts forecast this trend would likely be temporary as an improvement in the overall economic outlook on the back of the shift of business operations from China to Việt Nam and a better export outlook supported by the EU-Việt Nam Free Trade Agreement and Việt Nam’s ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, amongst others, should provide strong tailwinds for job creation which cater better to the capabilities of the workforce. A stronger labour market outlook should bolster incomes and consequently retail services.

Additionally, overall FDI in Việt Nam continues to be robust and this should also support services activities, especially in warehousing, transport, finance and real estate, over the coming months.

As the positive impacts are expected to mainly show in Việt Nam’s 2020 growth prints, Fitch revised up its 2020 growth forecast for Việt Nam to 6.8 per cent from 6.5 per cent previously. — VNS