Slower pace of activities in Q1 as expected

Data released by the National Statistics Office on April 4 showed Vietnam’s Q1/2026 economic growth slowed to 7.83% year-on-year from 8.46% in Q4/2025, but above our 7% forecast and Bloomberg consensus of 7.6%.

In general, activities tend to slow in the first quarter of each year due to fewer working days as a result of new year celebrations in Vietnam and other parts of Asia.

Activities were driven by manufacturing, construction and services as the export boom continued. Overall exports rose 19.1% year-on-year to $122.93 billion, while imports climbed 27% to $126.57 billion, with a trade deficit of $3.64bn, from a surplus of $3.09 bn in Q4/2025.

The U.S. remained Vietnam’s largest exports destination, with shipments surging 24.2% year-on-year to $33.9 billion, accounting for 28% of Vietnam’s total exports and largely in line with the 32% share seen in 2025. Manufacturing output gained 9.73% year-on-year in Q1/2026, comparable to 10.6% in Q4/2025 and slightly above the 9.3% pace a year ago.

Actual (or disbursed) foreign direct investment (FDI) in the first three months of this year rose by 9.1% to $5.41 billion, as companies continued to invest in the country to diversify supply chains in response to changing global trade rules and trends.

Consumer prices seeing direct impact from elevated energy costs

The most notable difference this quarter is that headline consumer price index jumped to 4.65% year-on-year in March 2026, from an average of 2.94% in January-February. The latest inflation rate is now above the State Bank of Vietnam's (SBV) target of 4.5%. This reflects higher energy prices which have already cascaded down to the consumer level, as the transport cost component (9.7% weight) surged 10.8% year-on-year compared to negative readings in the first two months of the year.

Among other measures to cushion against the energy shock, the government has tapped its emergency fuel fund to stabilize prices and some airlines have reduced capacity due to jet fuel shortages.

In an effort to shore up domestic fuel supplies, Vietnam has halted some taxes on gasoline, oil and jet fuel until April 15 to ensure national energy security. It’s also pushing for a faster transition to electric vehicles and biofuels as it seeks to reduce dependence on imported petroleum products, although this will only be a mid- to long-term solution that will not be able to relieve near-term disruptions tied to the Middle East conflict.

Deputy Minister of Industry and Trade Nguyen Sinh Nhat Tan had said earlier that domestic fuel supply is “currently sufficient to meet production and consumption needs through the end of April 2026".

Outlook: Trimming 2026 growth forecast to 7%

While external demand and production activities remained robust in Q1/2026, the energy shock from the Middle East poses near-term pressures to Vietnam and other Asian economies.

First is the higher costs (price effect) of energy as Brent crude prices continued to hover in the $100-110 range per barrel, which will impact directly on the transport and logistics sectors. Energy supply is the next critical factor as existing inventories and reserves are being depleted with the Strait of Hormuz remaining a chokepoint to shipping.

In addition to energy and fuel related products, the Middle East is a major source of critical inputs to sectors ranging from agriculture, construction to plastics, semiconductor and healthcare, among others. These materials include petrochemicals & plastics (e.g. high-density polyethylene resin, methanol, glycol ether), aluminum, fertilizers (phosphate fertilizer, urea fertilizer, ammonia), sulfur and sulfuric acid, helium, steel structures and parts. As such the risk of broader supply-chain disruption rises the longer the conflict drags on.

Against this backdrop of supply disruptions, which may take months, if not years, to recover completely, Vietnam’s official growth target of 10% for this year looks to be difficult to achieve. To hit that goal, a minimum of 10% expansion is required for each of the remaining three quarters in 2026.

U.S. trade policy is another risk factor to watch, as Vietnam – like other export economies – will be subjected to trade investigations e.g. Section 301 and related statutes. Vietnam and many other ASEAN countries have managed well in 2025 despite the imposition of “reciprocal tariff” in April. That resilience is encouraging, but much depends on the scope and timing of any further measures ahead.

Taking into account the above, we are revising down Vietnam’s full year growth forecast to 7% (from previous forecast of 7.5%; 2025: 8.02%). We assume the most difficult period will be in Q2/2026 and Q3/2026 as high global energy prices (and limited supplies) hit their peaks before easing toward end-2026, as outlined in Monthly FX and Rates Strategy - A brave new volatile world of Brent Crude oil at $100 / bbl (April 2, 2026).

For Vietnam, we expect the pace of expansion to slow to 6.5% year-on-year in Q2/2026, 6.8% in Q3/2026, and to 7% in Q4/2026, from our previous projections of 7.5%, 7.8%, and 7.6%, respectively. Overall, these forecasts are subject to substantial uncertainty and downside risks, depending on how and when the Middle East situation is resolved.

SBV to hold rates steady for now

With inflation rate expected to rise further in the months ahead and much more above the 4.5% target, the focus will be on the SBV’s policy stance. Given that the price increases are driven by supply rather than demand, policy tightening is not the right response.

As such, the SBV is very likely to “look past” such inflation pressures, at least for now. Instead, the burden will be on the central government to implement mitigating measures as price increases and supply shortages pass through to the broader economy.

Based on the above factors, we expect SBV to stay on hold with its refinance rate at 4.5% through 2026.

Suan Teck Kin, head of research, UOB, said: “The main challenges to prevent the country from achieving that target of 10% and above - at least in the short term (in 2026 and into 2027) - are the threats of U.S. tariffs remain real that could impact on US."

The other challenge, he added, is the Middle East conflict affecting energy prices and more critically, availability of supply – this would mean businesses are facing higher costs of energy and non-energy inputs thereby their operating costs, putting activities at risks.

On the positive end, the government also recognizes one large bottleneck or barrier of stronger growth is infrastructure, which will be critical to lift productivity and efficiency and at the same time raising aggregate demand.

These range from investments in enhancing transportation, logistics, ports/airports, electricity generation and delivery, water, digital, health care, education, training, among others – and it is accelerating investments in these areas.

Streamlining of public services that took place last year including combining of provinces and ministries and the adoption of English are examples of positive and significant move to raise efficiency and productivity.

For 2026, energy supply (with a reasonable cost) has become a top priority factor for factories, businesses, consumers, logistics etc to function normally and to ensure that economic growth is not affected significantly while keeping inflation rates in check.

It has implemented or planned a number of actions to reduce risks of supply being disrupted, and set a target of a 90-day fuel reserves. These include suspensions of fuel and environment taxes, deployment of the Fuel Price Fund, diplomatic efforts to secure supply from other countries including Japan, target saving of electricity usage of at least 3% in 2026, fast tracking of rollout of E10 biofuel gasoline from April 2026, building of oil storage facilities in Thanh Hoa province and also the possibility of allowing fuel companies to set their own retail prices within their own distribution networks, with government oversight.

"This is important for fuel prices to reflect the actual supply and demand and the product’s real value, rather than being distorted by subsidies and price controls," Suan Teck Kin added.