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Preserving Fiscal Space to Cope with Future “Shocks”

"According to CIEM, Vietnam's actual GDP growth exceeded its potential in the first and second quarters of 2024. Relying solely on monetary and fiscal easing to boost growth will intensify inflationary pressures. Thus, CIEM experts recommend preserving fiscal space to navigate future shocks."

Administrator

9 July, 2024

Vietnam’s Economy Sees Important Results in the First Half of 2024

On July 9, as part of the Macroeconomic Reform/Green Growth Program funded by the German government, the Central Institute for Economic Management (CIEM) in collaboration with the German International Cooperation Organization (GIZ) organized a workshop on “Vietnam’s Economy in the First Half of 2024 and Prospects for the Full Year: New Drivers for Quality Growth.”

Speaking at the workshop, Dr. Tran Thi Hong Minh, President of CIEM, said that since the beginning of 2024, Vietnam has emphasized the priority of promoting economic growth – on the foundation of macroeconomic stability, inflation control, and ensuring major balances. This comprehensive approach has yielded quite impressive socio-economic results in the first half of the year.

Dr. Tran Thi Hong Minh, President of CIEM, speaks at the workshop.

According to Dr. Minh, these results are very important but only a first step. As a research and policy advisory body for the Government and the Ministry of Planning and Investment, CIEM always emphasizes the message of deepening economic institutional reforms. Therefore, reviewing and assessing the economic situation in the first half of 2024 is also an opportunity to identify the drivers and challenges for economic institutional reforms towards quality economic growth.

According to CIEM, Vietnam’s actual GDP growth has exceeded its potential in the first and second quarters of 2024. Inflation tended to increase in the first months of the year, although it remained under control. Now, one issue to consider is whether the recommendation of counter-cyclical fiscal policy is still appropriate.

Presenting the research report, Mr. Nguyen Anh Duong, Head of the Comprehensive Research Division at CIEM, highlighted the remarkable achievements in the first half of the year. These include an economic growth rate of 6.42%, with all components of aggregate demand (exports, consumption, and asset accumulation) growing well, although the recovery is not yet solid.

There have also been positive gains in labor productivity. Calculated at current prices, GDP per employed person increased by about 10.2% in the first half of 2024 compared to the same period last year. During this period, the underutilized labor ratio was 4.3%, down 0.1 percentage points from the previous year. Some businesses have started applying artificial intelligence (AI) to improve efficiency and productivity, such as in e-commerce and professional graphics.

The results of FDI attraction and export-import growth are also highlights in Vietnam’s economic picture for the first six months. Meanwhile, inflation tended to increase in the initial months but remained under control. Credit debt has rebounded since March 2024, but there are concerns about the level and efficiency of capital absorption in the economy.

GDP Growth for the Full Year May Reach 6.95%

Overview of the workshop held on July 9, 2024. Photo: Hoang Yen.

Based on the analysis and assessment of domestic and global situations, CIEM experts presented two updated macroeconomic forecast scenarios for 2024.

In the first scenario, GDP growth is projected at 6.55% for 2024. Exports for the full year are expected to increase by 9.54% compared to 2023. The average CPI for 2024 is predicted to rise by 4.31% year-on-year. The trade balance is expected to maintain a surplus of $5.7 billion. This scenario assumes that global economic factors continue to align with assessments made by international organizations and that Vietnam maintains similar policy efforts as in the first half of 2024.

The second scenario is achievable with the assumption that Vietnam effectively implements reform solutions and economic management, thereby maximizing the disbursement and absorption of public investment and credit (including credit quality), improving labor productivity, enhancing the business environment, and increasing national competitiveness.

In this second scenario, GDP growth is forecast at 6.95% for 2024. Exports for the full year are expected to surge by 11.64% compared to 2023. The average CPI for 2024 is projected to increase by 4.12% year-on-year. The trade balance is expected to show a surplus of $7.3 billion.

The second scenario assumes a slightly improved global economic backdrop (faster growth recovery, increased investment in Southeast Asian countries including Vietnam, supply chain recovery, and positive shifts in investment for digital transformation and green transition).

To achieve the targets set for the remaining months of the year, CIEM put forward several policy recommendations. These include focusing on improving growth quality, providing timely guidance on implementing new effective laws, enhancing innovation capacity and adaptability to major trends (digital transformation, green transition), increasing labor productivity, and completing the legal framework for new economic models (circular economy, digital economy, sharing economy, and creative economy).

Regarding macroeconomic policy management, Mr. Duong suggested that appropriate policies are necessary. If the focus is solely on monetary and fiscal loosening to boost growth, inflationary pressure will increase. Therefore, it is crucial to closely monitor inflationary trends (the impact of wage increases and price hikes in goods under state price management) while preserving fiscal space to cope with future shocks, he emphasized.

Hoang Yen