The consulting firm McKinsey of the United States has recently published an article on its website praising the recovery capability of the Vietnamese economy after successfully containing the spread of the novel coronavirus (COVID-19) pandemic.

An auto assembly line at Toyota Motor Vietnam in Vinh Phuc province (Photo: VNA)

According to the article, the country has been one of 11 outperformers among emerging economies, even becoming the first to fully reopen its domestic economy since the last known community transmission case of the COVID-19 was detected in the country more than two months ago. 

The article states that Vietnam has fared much better economically than many other countries, but it has not been completely spared some damage. GDP growth during the first quarter was at its lowest level since 2010, although it still remained in positive territory at 3.8%. With exports and tourism severely affected, domestic consumption looks set to be critical for the economy moving forward.

The article notes that, buoyed by a rapidly growing middle class and rising levels of disposable income, domestic spending has long been a key driver of growth for the country, accounting for 68% of overall GDP. 

Although under pressure as a result of falling demand, two-thirds of Vietnamese surveyed in April said their income had been disrupted by the COVID-19 while 55% said they had cut back on spending, the “engine” has largely remained in gear.

Most notably, the country’s suspension of nonessential activities lasted for only 22 days, significantly shorter than the majority of other countries, easing some of the pressure on consumption. Moreover, a VND 27 trillion stimulus package was released in March, with the fund targeting households and small businesses, also helping to shore up demand.  

According to the article, there still remains plenty of question marks on how long domestic consumption can keep the economy afloat in the absence of a return to growth in other key sectors. Despite this, a closer look at the spending characteristics of Vietnamese citizens gives some reason for confidence. 

The main factor behind this optimism lies in spending on essential goods and services, which accounts for 42% of national GDP, in comparison with just 26% for discretionary spending. Spending cutbacks are most likely to be felt in the discretionary-spending category, therefore a significant slice of the Vietnamese economy could be relatively well insulated, the article notes. 

Furthermore, the article emphasises that in recent years manufacturing has served as a crucial sector in Vietnamese growth, prompting the country to achieve one of the highest trade-over-GDP ratios in Southeast Asia. Although the sector is strong, the COVID-19 did hit it hard, first through supply disruptions caused when China went into a lockdown, and then suffering from a plummeting demand due to key export markets stalling. 

In the face of plenty of challenges, there are several encouraging bright spots on the horizon. The manufacturing sector’s importance to the country’s overall economy is clear, with key steps being taken to keep operations running despite lockdowns occurring in other countries, the article states. 

For example, engineers from two major international electronics manufacturers were permitted to enter Vietnam earlier this year in order to ensure their factories continued to run at full capacity. The Government also collaborated alongside local businesses to rapidly boost production of personal protective equipment used for essential workers, allowing them to gain access to global markets. 

As manufacturers across worldwide begin to rethink their supply-chain strategies in an effort to address the frailties exposed by the pandemic, the country remains in a strong position and is looking like an attractive offshoring destination.

A McKinsey survey conducted among fashion-sourcing executives published in May supports this view, with 24% of respondents saying they expect to see an increase in production in Vietnam, more than any other location throughout Asia.

The article predicts that this year will no doubt continue to be challenging, but Vietnam can still expect to enjoy similar levels of strong growth next year, just as seen in recent years. Furthermore, it will likely see its position as an offshoring location reinforced once the global economy begins to recover. 

Harnessing this energy to develop into a middle-income nation will require multiple long-term investments in smart technologies amid Industry 4.0 and greater levels of infrastructure development.

The article elaborates that if the country can continue its enviable record of keeping community transmission of COVID-19 at bay, while simultaneously making the correct structural shifts to drive economic growth over the next decade, it will not only recapture its pre-COVID-19 economic position, but drive new economic growth.

The majority of international agencies expect that the Vietnamese economy is likely to bounce back later this year and accelerate into next year. The Asian Development Bank, World Bank, and International Monetary Fund all released forecasts predicting Vietnamese GDP growth would reach 6.8% or 7.0% in 2021.