Vietnam’s performance is not as bad as it looks in the broader context of a cooling tech cycle and subdued global demand.

Vietnam’s Economy Has Full Strength to Overcome the Bumpy 2019
During what has been a bumpy 2019, Vietnam has managed to weather through risks to growth relatively well. At first glance, some headline numbers may not look rosy compared to previous quarters. 2Q19 GDP gradually slowed to 6.6% y-o-y, driven by slower growth in the manufacturing sector of 9.4%. 
Manufacturing contribution to GDP fell below 2ppt for the first time in two years, dragging down economic growth slightly. However, Vietnam’s performance is not as bad as it looks in the broader context of a cooling tech cycle and subdued global demand.
Exports rebounded strongly to 9.5% y-o-y from the 13-quarter low of 5.1% in 1Q. In particular, electronics exports showed strong momentum, accelerating 15% in 2Q from 1% in 1Q – although this is partly explained by low base effects. In June, computer and phone-related shipments jumped to 17% y-o-y, the fastest pace in almost a year. 
HSBC also sees the same trend from the imports side. Electronics imports grew 31% y-o-y, contributing c.40% to overall imports growth. As HSBC noted earlier, this is likely a harbinger for a stronger electronics exports cycle to come, as a large part of electronics imports are components to be imbedded into final goods for export. 
All in all. Vietnam’s resilient manufacturing sector continues to drive exports and growth, making it stand out in a region where growth is on a downward trend.
But it’s not only manufacturing. Services, another pillar of growth, continued to expand steadily. It grew 6.9% y-o-y in 2Q, thanks in part to a flourishing tourism industry (see Vietnam at a glance: Blooming tourism, 3 June 2019). It is therefore no surprise that tourism-related industries, such as retail sales, transportation, and accommodation services, continued to grow steadily, contributing to a more diversified growth outlook. 
Vietnam has welcomed a record high of 15 million tourists in 2018, and by mid-2019, tourist arrivals are growing 7.5% y-o-y (Chart 2). The trend is likely to continue in 2H19, especially as the northern hemisphere enters the winter season. HSBC expects services growth to remain robust for the rest of the year, bringing FX inflows and creating job opportunities.
Room for optimism
As a highly exposed economy, Vietnam is not immune to global trade tensions. But looking ahead, HSBC still has some reasons to remain optimistic. Manufacturing PMI accelerated to 52.5 in June, ending 2Q with a stronger reading than 1Q and reflecting ongoing optimism in Vietnam’s manufacturing sector. 
The June reading was primarily driven by higher new orders, expanding at the fastest pace since 2019. Panellists attributed the rise in new orders to the launch of new products and rising customer numbers, which also led to higher backlogs of work (Nikkei, IHS Markit). 
As such, the employment sub-index returned to expansionary territory, suggesting a positive hiring outlook. That said, HSBC also sees some negative impact of the lingering trade war, with new export orders expanding at a slower pace during 2Q.
Moreover, strong growth in Vietnamese exports to the US has caught the eye of US President Donald Trump, suggesting a risk that trade tensions may impact Vietnam more directly. Still, HSBC believes business confidence should hold up, and manufacturing production should stay strong – after all, FDI inflows remain strong.
In the first quarter, total and new registered FDI into manufacturing increased 66% and 33% YTD y-o-y, respectively. China, outpaced Vietnam’s other major investment partners, boosting investment 411% y-o-y. This partly reflects the trade diversion trend HSBC started seeing since the beginning of the year, and the trend is likely to continue over the near term – from both Chinese and non-Chinese firms. 
For example, LG announced in April that it would relocate its premium phone manufacturing to Hai Phong in 2H19, which accounts for 10-20% of LG’s smartphones (Cnet, 25 April 2019). With additional manufacturing capacity, HSBC expects to see continued robust growth in Vietnam’s manufacturing, which should hold up growth in 2019. HSBC expects growth to come in at 6.7% in 2019.