World Bank Predicts 4.7% Growth in 2023
Vietnam’s economic growth experienced a significant slowdown in the first half of 2023, following a global economic downturn and weakened domestic demand, after achieving 8% real GDP growth in 2022. During this period, real GDP growth dropped to 3.7% year-on-year, a significant decline compared to the previous year’s 6.4%. Dorsati Madani, senior economist at World Bank Vietnam, explained that the slowdown was primarily driven by a sharp decline in external demand, with exports contracting by 12% during the first half of 2023, impacting the performance of the export sector, which accounts for approximately half of Vietnam’s GDP.
Simultaneously, domestic demand also moderated due to the fading effects of the post-COVID rebound experienced last year and weakening consumer confidence. Growth in final consumption expenditure slowed to 2.7% year-on-year, compared to 6.1% in the first half of 2022. Despite resilient foreign direct investment (FDI) and a slight increase in public support, overall growth in this area declined due to weak private domestic investment, which decreased significantly to 2.4% year-on-year, compared to 11.8% during the same period last year.
To support the economy amidst decreasing inflationary pressures and slowing growth, the State Bank of Vietnam implemented monetary policy loosening measures. It reduced discount and refinancing rates by a total of 150-200 basis points through four policy rate cuts between March and June, bringing the rates to 3% and 4.5% respectively. However, credit growth slowed from 16.8% year-on-year in June 2022 to 7.8% in the same month this year, reflecting weaker demand from businesses.
The report highlights that Vietnam’s economic outlook is subject to both domestic and international risks. Slower-than-expected growth in advanced economies could further dampen external demand for Vietnam’s export sector. Uncertainties in the global financial market could lead to stress in the banking sector, increase investor risk aversion, and discourage investment, including FDI in Vietnam. Additionally, further tightening of monetary policy in major advanced economies to combat persistent inflation could widen the interest rate gap between international and domestic markets, potentially exerting additional exchange rate pressures on the local currency.
The report suggests that active fiscal policy support is necessary as economic growth has sharply declined. Full implementation of the planned investment budget, which would increase public investments to 7.1% of GDP in 2023, can provide a fiscal impulse of 0.4% of GDP to support aggregate demand. Fiscal policy can also contribute to the sustainability of Vietnam’s economic growth by investing in human capital and skills to improve productivity, enhancing resilience to climate change through prioritizing greener production and consumption, and implementing carbon taxation and other fiscal instruments to incentivize industries to adopt more sustainable practices.