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Manufacturers in Vietnam, a country considered to be one of the fastest-growing economies in the world due to its manufacturing prowess, are experiencing a major slump in their businesses. This comes along with a fall in trade activity, which has further crippled Vietnam manufacturing activities as the Southeast Asian country heavily relies on imports and exports.
The slump comes amid a global economic slowdown that caused a stark reduction in the demand for Vietnam’s products. Worldwide economic output is projected to be just 1.7% in 2023, thereby slowing global growth, according to the World Bank.
Impact on Vietnam manufacturing
Affected sectors include industrial property, textiles, smartphones and electronics, all of which were once thriving in Vietnam’s manufacturing endeavours.
The country reported a fall of 11.9% in overall exports during the January-March period compared to last year. As per Vietnam’s statistics office, a decline of 12% in exports was seen in all the leading product categories such as clothes, wood products, shoes, phones and other electronics. Computer and electrical products led the 15% year-on-year import decline last quarter, according to an analysis by Maybank.
For the month of March, Vietnam’s manufacturing PMI dipped to 47.7 and fell into contraction after growing in the previous month. Overall orders have fallen for four out the past five months as overseas demand shrunk. However, S&P Global believes Vietnam’s industrial production will rise by 6.6% in 2023.
Vietnam saw economic growth slowing to 3.32% in the first quarter of 2023, compared to an expansion of 5.92% in the fourth quarter of 2022. Economists had to rework their full-year forecasts and cited risks such as stress in the domestic property sector and angst because of a global recession affecting factory orders. Oxford Economics predicts Vietnam to experience a GDP growth of 4.2% in 2023, which is down by almost half from the 8% growth last year.
Meanwhile, the State Bank of Vietnam, the country’s central bank, reduced the interest rate on March 31 this year to push for economic growth and it is the second rate cut in the month. The bank lowered its benchmark by 50 basis points from 6% to 5.5%.
The country’s inflation rate dropped to a seven-month low of 3.35% in March from 4.31% in the month before mainly because gasoline prices fell.
Vietnam manufacturing competing with China
Vietnam has emerged as one of the top destinations for corporates implementing the China Plus One strategy thanks to its cheap labour, access to free trade and robust supply chain networks. However, the current Vietnam manufacturing woes might dent growth in the sector which otherwise has a bright outlook.
“Vietnam is a frontier market star. While it is often overshadowed by continental heavyweights China and India, or more established emerging markets such as Indonesia and Malaysia, Vietnam in our view is one of the best structural growth stories in the developing world,” John Paul Lech, Portfolio Manager at Matthews Asia said last year.
After the USA, China is the top buyer of Vietnam’s exports. Apart from counting on the citizens of China for tourism, Vietnam heavily relies on the country for imports, which has caused large trade deficits. Vietnam hoped for better business with China once Beijing relaxed its zero-COVID restrictions, but that has not been the case so far as seen by the trade figures.
“Vietnam is becoming the manufacturing powerhouse of the world, as factories continue to move there, and it is benefiting from diversification of supply chain by multinational companies from all over the world. Instead of only producing cheap T shirts and sneakers, it is assembling electronics goods, and will even soon start assembling products for Apple. As factories continue to pop up like mushrooms in Vietnam, locals are integrated into the workforce and the global economy,” as per Joseph Lai, Chief Investment Officer at OX Capital Management.
– reporting by Jovan Thomas
