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Wednesday, July 24, 2024

Coping with global uncertainties

By Tony Phan

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Dynamics for global growth are seen weakening in 2023, posing challenges for Vietnamese enterprises in the coming time.

Managing director of the International Monetary Fund (IMF) Kristalina Georgieva has recently warned of more setbacks for the global economy in 2023, as three economic powerhouses namely the United States, Europe and China have been decelerating. The IMF projects the global economy will grow only 2.7% in 2023 against 3.2% in 2022. Meanwhile, the Organization for Economic Cooperation and Development (OECD) gives a bleaker global economic growth forecast in 2023, at 2.2% against its estimate of 3.1% for 2022.

Global inflation is expected to ease in 2023, but still remains relatively high. The IMF predicts inflation at 6.5% in 2023 compared to 8.8% in 2022. Inflation will be more acute in the U.S., which will affect this country’s economic policies while other economies with connections to the U.S. will also feel the pinch.

In 2023, the global economy will have to address two major issues with contradictory correlations but requiring equilibrium, which are high inflation and low growth.

Mired in policies

First emerging are policies on harnessing inflation. If economies in the world, especially the U.S., set inflation control as the top priority, it is more likely they will hike interest rates to drain money from the market, and consequently, lending rates will rise. Lower money supplies will cause commodity prices to fall.

However, higher lending rates will push up input costs, thus partially impeding the target of the rate hike policy (to contain inflation). Therefore, it is probable major economies will scale up interest rates for final-consumption activities while maintaining a stable lending rate for business. Such an approach is meant to stimulate production of lower-priced commodities for consumers.

With this approach to stimulate production of lower-priced commodities while discouraging consumption, global trade can hardly benefit in the short term. Consumer demand does not rise while locally-produced commodities are cheaper – as a form of indirect subsidy.

Therefore, controlling inflation by restricting money supplies in the short term will hinder global trade. Meanwhile, it is difficult – in the short term – to cap inflation by boosting productivity and production efficiency although it stimulates global trade and consumption.

From another perspective, if countries prioritize economic growth, the approach will be different compared to the priority of containing inflation, although policies will evolve around the monetary vehicle in the short term. They will have to lower interest rates to stimulate the domestic economies. If the stimulus measures target end-users (regardless of domestic or imported commodities), enterprises shipping commodities to these markets will benefit as consumers have more disposable income.

It is more likely policymakers will opt for policies to support domestic production, thus stimulating consumption of locally-produced commodities and economic growth. However, for essential commodities not locally acquired like food and foodstuff and tropical veggies, exporting countries still benefit from stimulus policies.

Recommendations for Vietnam

To minimize adverse impacts from importing countries, Vietnam needs to map out more sustainable domestic consumption stimulus policies.

Policymakers should consider lowering interest rates for consumers and the value added tax for final-consumption commodities. Such policies can stimulate domestic consumption which helps lessen the burden stemming from weaker external demand. Vietnam’s export items for the most part are final-consumption commodities like farm produce, garments, footwear and finished electronic products, while capital goods like industrial machinery and components are few and far between, so domestic consumption can compensate for the weaker external demand in the short term. However, any stimulus program should take into account socio-economic conditions and inflation, because accomodative policies may lead to inflation if local production does not grow accordingly.

Enterprises, meanwhile, need to weigh the risks of their commodities being replaced and prepare alternative plans to return to the domestic market if possible. The domestic market, with an annual retail goods and service value of US$200 billion, can serve as a cushion to absorb the redundancy of commodities if the external demand tumbles in the short term.

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