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Slowed rate of inflation raises fears of possible recession

Update: June, 04/2012 - 10:37

Inflation rose by 0.18 per cent in May compared to the previous month, reaching a rate of 8.34 per cent since a year earlier, a rate lower than had been predicted. Viet Nam News spoke to experts about the trend in consumer prices.

Phung Quoc Hien, chairman, National Assembly Committee for Finance and Budget:


Phung Quoc Hien
I do not think there will be a recession with the low inflation figures in May. We need to be careful when talking about recession or deflation or else we can discourage growth. Growth in the first quarter was just 4 per cent, the lowest level in the last five years, excluding 2009 in the wake of the global economic downturn. Contrary to the situation in 2009, in which we faced negative growth for seven consecutive months, now we still have positive growth of 4 per cent. If, in the second and third quarters, we have lower growth, then we could be facing recession. At the moment, I think, we still lack evidence of a recession or decline in the economy.

Growth in the first quarter was still higher than the inflation rate. This is an achievement we have never gained before. It shows that we have been successful in our initial targets of controlling inflation, with the CPI increasing by just 2.6 per cent in the first three months of the year against December.

The current situation suggests that the purchasing power of the people is declining due to stagnant earnings and income. Enterprises are in a special hardship. In the past, only small enterprises faced problems, but now even large enterprises with capital of trillions of dong are facing problems.

Vu Dinh Anh, Ministry of Finance's Academy of Finance:


Vu Dinh Anh
The target of low inflation in 2012 is within our reach. By May, inflation had been 8.34 per cent compared to the same period a year earlier. In the coming months, I think the average increase in CPI will return to single-digit levels.

However, there are problems facing aggregate demand as it is still increasing at a slow pace. By the end of the first quarter, sales of retail goods and services had risen by just 5 per cent. Meanwhile, the Ministry of Planning and Investment has predicted a 4.2-per-cent increase in GDP in the second quarter, comparable to the same period in 2009.

As a result, there is a threat of deflation in the future if we do not take appropriate measures to address the recession in production and inventory and improve consumer confidence.

We have not experienced deflation in recent years. In principle, deflation has negative impacts like inflation, but it's much more dangerous. It goes along with a decline in the economy and very low growth, and a lack of stimulation which can help lift up the economy. As Viet Nam's economic scale is still small, deflation would have a very negative impact on growth. I hope the Government will take timely and proper measures to resolve the situation to avoid a possible deflation.

Deepak Mishra, lead economist, World Bank Poverty Reduction and Economic Management Unit:


Deepak Mishra
Inflation has been falling rapidly in the past few months. From a peak of 23 per cent in August 2011, it has fallen to 8.3 per cent as of May 2012. The speed of the decline has been much faster than anyone expected. There are many factors responsible for this rapid deceleration of prices. Relatively successful implementation of Resolution No 11, especially on the monetary policy front, has helped. Global factors which contributed to higher inflation in 2011 have been less unfavorable this year. Food prices, which are the main driver of inflation because of their higher weight in the basket of goods used to calculate inflation in this country, have been especially low this year because of the falling price of rice and the very high price increases last year.

It is also important to note that the inflation rate is highly seasonal in Viet Nam. Inflation increases early in the year because of the Tet (lunar new year) shopping season. It then stays low during the months of May, June, July and August and starts to increase again in September. So one should not be terribly surprised that inflation has come down rapidly in May, especially because last year we had fuel price and electricity rate hikes during this period.

Are we in a deflationary period? We don't think so. If you look at neighboring countries – China, Thailand, Malaysia, Indonesia and the Philippines – all these countries have much lower inflation rates than Viet Nam and nobody is talking about deflation in there. Many Vietnamese experts and policymakers mostly look at month-to-month changes in inflation. In month-to-month changes, you could have a month with negative inflation or very small inflation. But that's not same as being in a deflationary period. Deflation means a continuous decline in prices for months. In fact, at the World Bank, we still feel inflation will be as high as 8 per cent by the end of the year.

We think the immediate concern for Viet Nam is the growth slowdown and not deflation. Some parts of the economy have slowed down faster than others such as construction, real estate and some areas of manufacturing. The Government has already started to act on this by announcing a mini-stimulus package in the form of Resolution No 13. At the same time, the State Bank of Viet Nam has reduced interest rates by 300 basis points in a span of eight weeks. We think these are the right policy response in the current circumstances, though it is important to avoid premature and rapid loosening. The Government has a better track record of stimulating the economy during slowdowns than slowing down the economy during periods of overheating. So we don't believe that the Government will sit and watch if the economy slows down too rapidly. If things go from bad to worse, we will see proactive policies from the Government to lift the economy. And we also expect some progress on the restructuring agenda in the next few months. Therefore we expect growth to rebound during the second half of the year. — VNS

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