Vietnam: Q1 2022 GDP Grows, But Supply Chain and Inflation Challenges Remain

By IndraStra Global Editorial Team

Cover Image Attribute: Nhật Tân Bridge, Hanoi (Vietnam), Image by Quang Nguyen vinh from Pixabay 

Vietnam's economy performed well in Q1 2022, indicating that the country is open for business and tourism, but issues continue due to workforce shortages, supply chain disruptions, and inflation. Despite many past COVID cases, widespread vaccination has reduced the severity of the disease and mortality to a minimum, allowing enterprises to remain operational. While Vietnam's economy is booming and traffic in major cities has nearly returned to pre-pandemic levels, external geopolitical issues threaten to derail this expansion.

Like several other nations, Vietnam is suffering from rising oil costs, limited coal supply, inflation, the fallout from the Russia-Ukraine crisis, and Chinese economic lockdowns. The World Bank projects that Vietnam's GDP will rise by a modest 5.5 percent due to these factors. Moreover, inflation is likely to be aggravated further as oil prices rise. Steel and oil prices have increased the most, by up to 80 to 90 percent, according to Juki Vietnam, a subsidiary of Juki US. Nonetheless, the government has pledged to keep inflation at or below 4% this year.

Vietnam is highly reliant on raw materials imported from China and other nations as a manufacturing hub. However, with China facing lockdowns with limited movement at critical ports, such as Shanghai, sourcing input raw materials have grown increasingly complex. Additionally, while some enterprises have attempted to diversify their inputs, high freight charges have put a financial hardship on them while a container shortage persists. According to the Vietnam Logistics Association, the average cost of shipping containers from Vietnam to the US east coast has tripled to almost US$16,300.

Infographic Attribute: Vietnam PMI – manufacturing purchasing managers index / Source: S&P Global & IHS Markit

As illustrated in the infographic above, Vietnam's PMI has been increasing steadily since October 2021, when lockdowns were lifted but had its first downturn in March this year due to the recent surge of positive cases, which has resulted in a labor shortage and inflation headwinds.

Production has also been affected by labor shortages. While factories continue to operate, workers who test positive for COVID-19 - are required to isolate, causing further shortages and disrupting output. Suppliers to Nike and Adidas reported that approximately 40% of their workers had COVID-19. Additionally, workers who returned home following the lifting of restrictions have not returned to their hometowns. As per the latest General Statistics Office (GSO) report, 441,100 workers were added to the labor force in Q1, but this is insufficient. While factories say that orders have increased, they report that recruiting is a significant difficulty impeding output.

Nonetheless, the global supply chain issue highlights the importance of diversifying supply networks to protect against force majeure and geopolitical threats. The Russia-Ukraine conflict is merely the most recent example; other recent examples include the disruption caused by the COVID-19 outbreak and global market volatility resulting from the US-China tariff escalation.

Vietnam has taken steps to mitigate the impact of price increases, such as lowering gasoline prices. Still, the World Bank emphasizes that a more focused strategy is necessary to help develop resilience to future shocks. In addition, it says that other structural reforms may be essential to facilitate conducting business, reduce logistical costs, and provide the workforce with the requisite skills.

Latest Performance Figures

According to GSO, Vietnam's GDP rose by 5.03 percent in Q1 2022 (January-March). However, growth slowed from 5.22 percent in Q4 2021. Nonetheless, the official agency noted that Vietnam's economy is on the mend.

Services accounted for 41.70 percent of GDP in Q1, followed by industry and construction at 37.97 percent and agriculture, forestry, and fisheries at 10.94 percent. Consumer goods retail sales climbed by 4.4 percent year on year, despite a decline in the passenger movement. 

On the other hand, Vietnam exported US$88.58 billion and imported US$87.77 billion. As in prior years, the US continues to be Vietnam's largest export market, accounting for US$25.2 billion in merchandise. Overall, the country's exports and imports were US$176 billion in Q1, up 14.4 percent year on year.

In terms of FDI, disbursements were US$4.42 billion, an increase of 7.8 percent over the same period last year. As has been the case in previous years, Singapore topped the list, followed by South Korea, Denmark, and China. Furthermore, Binh Duong province ranked first in total registered investment capital because of the Lego Group's estimated US$1.3 billion investment in Binh Duong by Danish investors.

NOTE: This article is the abridged version of an original article that was first published in the Vietnam Briefing, produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in China, Hong Kong, Vietnam, Singapore, India, and Russia. Readers may write to info@dezshira.com for more support.

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