Economic Update – COVID-19’s impacts lingered

• The manufacturing sector remained strong despite the 4th COVID-19 outbreak. PMI remained above the 50-pt level at 53.1pts in May.
• The service sector saw contraction due to social-distancing measurements. Total retail sales of consumer good and service slid 3.1% mom
• Inflation well-managed. Headline CPI rose 2.9% yoy in May, which was lower than our expectation.

Manufacturing continued to expand
According to the General Statistics Office of Vietnam (GSO), Vietnam’s Index of Industrial Production (IIP) edged up 1.6% mom and 11.6% yoy in May 2021 (vs. April’s growth level at 1.1% mom and 24.1% yoy). This is an encouraging improvement in the context that Bac Giang and Bac Ninh provinces, two of Vietnam’s industrial centers, shut operation of some industrial park zones in several days to prevent new COVID-19 infections. Vietnam’s IHS Markit Purchasing Managers’ Index (PMI) still remained above the 50-pt level in May at 53.1pts, suggesting continual expansion of manufacturing activities despite COVID-19 impacts.

Service sector decline in May due to 4th COVID-19 outbreak
The fourth wave of the pandemic is having a negative impact on the services sector. Tourism was hit the most since tourists canceled flights and hotel bookings due to fear of catching the virus. Also, the lockdowns in some localities in Bac Giang and Bac Ninh provinces, along with the halt of some nonessential services in other provinces stifled growth in some service sub-sectors, including accommodation and catering, travel, and entertainment. As a result, total retail sales of consumer goods and services in May slid 3.1% mom and 1.0% yoy (vs. a strong increase of 1.5% mom and 29.9% in Apr).

Inflation well-managed
Headline inflation was 2.9% yoy in May 2021 (from 2.7% yoy in Apr 2021), which is lower than our expectation. On month-on-month basis, headline CPI inched up 0.2% vs. Apr level. The headline was mostly driven by the 0.8% mom increase in the transportation price index and the 0.4% mom increase in the accommodation & construction materials index.

We trimmed our 2Q21F GDP growth to 7.0%
We trimmed our 2Q21F GDP growth to 7.0% from a previous forecast of 7.5% as the service sector was hit hard by the 4th wave of COVID-19. However, we maintained our 2021F GDP growth at 6.7% as we expect a stronger expansion of the manufacturing sector in 2H21 thanks to higher demand from the US and EU.

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