Consumer trends will be stronger

Vietnam has started 2024 with signs of a solid economic recovery. On this occasion, HSBC Global Research published the report Vietnam at a glance: “Taking the pulse” of consumers.

A "smooth" start

Data shows that Vietnam has started 2024 on a high note as exports continue to recover despite the base effect related to the Lunar New Year. According to HSBC Global Research, Vietnam has started 2024 with signs of a solid economic recovery. Overall, January was a "good start" for Vietnam's economic recovery. Even taking base effects into account, exports have bounced back at an astonishing pace, as evidenced by stable trade volumes.

However, we need to be cautious with the overall recovery as the export engine needs to be fueled by growth in the world's major economies. Meanwhile, inflation is generally under control but the risk of price increases remains, from potential increases in electricity prices to rising rice prices.

2023 is not only a difficult year for Vietnamese exporters but also for consumers. Personal consumption is expected to grow by only about 3%, half the previous average. While the overall unemployment rate remains low, the slowdown in job growth reminds us that the labor market is not yet back to pre-pandemic levels.

After a challenging year in the year of the Cat, the outlook for Vietnam is expected to improve in the year of the Dragon. While the all-important export cycle remains a focus, it is equally important to assess how domestic demand is performing. The short answer is: Although domestic demand is expected to offset the slowdown in the external sector, it is also under increasing pressure but is expected to improve, with early signs being a recovery in some consumer stocks.

This is further confirmed when looking at Vietnam’s labor market. While unemployment remains low at 2.3%, employment growth has slowed in 2023 and is still heading towards – but not yet fully – recovery. It is important to remember that a large part of Vietnam’s labor market is concentrated in the informal sector, a trend that is not new in ASEAN. This proportion in the textile and garment manufacturing sector accounts for nearly half and even reaches 60% in some tourism- related service industries.

Clearly, Vietnam is anxiously awaiting a cyclical recovery in global trade, which is the main hope for the job market. Meanwhile, a full recovery in the tourism sector is also crucial for the labor market, supporting those working in the service sector.

Thanks to favorable policies extending visa-free stays for foreign visitors from a number of countries and issuing electronic visas (e-visas) to citizens of all countries from mid-August 2023, Vietnam welcomed about 12.6 million foreign visitors (70% of the 2019 level), far exceeding the initial target of 8 million.

The favorable outlook has even prompted the Vietnam National Administration of Tourism to set an ambitious target for this year of 17-18 million foreign visitors, close to the record high of 2019, aiming for total revenue of VND840 trillion (8% of GDP), exceeding the 2019 level. Based on past trends, this means international tourism in 2024 is likely to reach around 4% of GDP, similar to the pre-pandemic average for Asia.

However, competition for tourism in the region is intensifying. While the recovery in Chinese visitors has been slower than expected, a full recovery in ASEAN tourism will require a significant influx of Chinese tourists, the largest source of tourism. Countries in the region including Thailand, Malaysia and Singapore have all introduced visa-free programmes for Chinese visitors, increasing the appeal of a “spontaneous trip” for tourists.

Stronger consumer trends

“Despite the short-term cyclical challenges, we believe that structural trends remain promising for Vietnam. With impressive growth over the past 20 years, the overall increase in wealth has fueled a stronger consumer trend, stimulating a shift towards discretionary goods and services,” the report said.

Looking at the trend of discretionary spending, although the proportion of motorbikes as a means of personal transport remains high in Vietnam (with a vehicle ownership rate of up to 70%), the number of car purchases is gradually increasing. In fact, average income has increased faster than spending in recent years, helping to support increased consumption.

The rise of the emerging middle class has attracted the attention of international businesses looking to capitalize on Vietnam’s rising spending power. The surge in Japanese FDI into the retail and financial services sectors is a notable example. Despite rising wealth, nearly 80% of the population remains unbanked or underbanked, according to the Asian Development Bank (ADB).

The World Bank’s latest Financial Inclusion data also demonstrates this, showing that Vietnam has significant potential to develop formal lending channels, which are still in their nascent stages of development.

While the potential looks bright, we need to be mindful of the risks involved. The main concern is rising household debt. Unsustainable increases in consumer leverage can create risks, as well as impact future consumer spending by cutting back on income to pay down debt.

Fortunately, the Government has rolled out a series of support measures for both businesses and households in 2023, such as extending tax breaks, cutting interest rates and extending debt repayment periods.

“In our view, cautious but improving sentiment towards the property sector will boost overall consumer sentiment, while improving labour market prospects will support wage growth, thereby improving household debt servicing capacity,” HSBC Global Research forecast.

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