Inflation and Growth Traps

Data released by the General Statistics Office (GSO) a few days ago showed that Vietnam’s CPI in August fell by 0.07 percent over the previous month and climbed 0.61 percent over the same period of a year ago. This surprised both specialists and authorities.

 

CPI seldom falls in August as this year. According to GSO, in the past 10 years, the lowest August CPI growth was in 2014, rising 0.22 percent. In the first eight months of 2014, inflation went up 1.84 percent while the same period in 2008 saw a 21.65 percent growth. The eight-month CPI growth was also the lowest in 10 years.

 

Before this situation, Minister of Planning and Investment Bui Quang Vinh said that inflation will not reach the target of 5 percent growth set for this year. Even more likely, this year's inflation may be less than 2 percent.

 

According to the Ministry of Planning and Investment of Vietnam, controlling inflation at a low level is an important condition for macroeconomic stability and sustainable economic development. This is widely agreed by economists. However, the issue is whether that low inflation is laudable or worrisome.

 

Last year, when the Government of Vietnam aimed to cap inflation growth at 7 percent, the final result was just 1.84 percent. According to experts, together with the GDP growth of close to 5.98 percent, Vietnam achieved double objectives. This year, economic growth may beat forecasts while inflation will be contained at a low level. The macro economy will be stable and the income of people is not affected. The Ministry of Planning and Investment stressed that a lot of indicators outdid the targets in 2015, including inflation control. However, Mr Dao Hung, Director of Development Policy Academy, expressed his concern, “In Vietnam, how will the economic growth be like at the back of the 2 percent inflation?”

 

Hung’s question is natural as the record low inflation entails considerable concern. If so, whether the inflation of below 2 percent in 2015 can be considered “better than the target” or not?

 

Two months ago, he presided over a seminar in retrospection of market and price movements in the first six months, against the joy of many experts to see the lowest inflation growth in 14 years, Nguyen Duc Do, Deputy Director of Economics - Finance Institute, did not hide his anxiety about the risk that the Vietnamese economy would fall into deflation rather than the risk of returned inflation. He pointed out that, to avoid the deflationary zone, economic growth had to be higher than 6.5 percent. "If GDP growth is only 6 - 6.25 percent, the probability of the economy falling into deflation is enormous," he added.

 

Previously, the Development Policy Academy also conducted research and its results showed that developing economies like Vietnam need a reasonable inflation rate to have a growth economic rate of 7 percent or higher. “The reasonable inflation rate must be 7 percent," he noted. And, that’s why he raised his concerns over the very low inflation in the second straight year. Earlier this year, after seeing the inflation growth of 1.84 percent in 2014, Prime Minister Nguyen Tan Dung urged measures to regulate inflation growth to 5 percent in 2015 to achieve a higher economic growth. As inflation and growth closely correlate, many experts are wondering that how the economic growth is above 6 percent with such low inflation. This question needs to be further analysed and discussed.

 

Furthermore, recent economic developments also drew some fear from economic experts, from the bad development of the domestic commercial banking system to China’s yuan devaluation, or stock market slump or crude oil price plunge. These developments are considerably challenging Vietnam's economy.

 

Right at the time Vietnam's economy is facing a series of unfavourable developments and economic instability risks, the Ministry of Planning and Investment is drafting the socioeconomic development plan for 2016. Optimistic enough, the draft envisages the economic growth of 6.5 percent and inflation growth of 5 percent.

 

If the target is achieved, the economic growth will escape the growth trajectory of 5 - 6 percent in recent years in the first year of the 2016-2020 five-year plan. But, the target that Vietnam aims in the five-year period is 6.5 - 7 per cent a year rather than just 6.5 percent. Therefore, the challenge ahead is considerable. Even, the economic growth is 6.5 percent and the inflation growth is 5 percent in 2016, Vietnam will have to make an effort. The risk of global economic volatility, especially the development step of China, the second largest economy in the world, is mentioned most. China’s economy is forecast to grow 7 percent this year but it may miss this target as many fear. Lower growth and weaker export result in China’s recent devaluation of its currency, yuan. Thus, according to economists, instead of worrying impacts of yuan devaluation on Vietnam's economy, the real growth of Chinese economy is worthier of concerning. A small change in its economy may stir the world’s economy, not only Vietnam.

 

Risks ahead are clearly enormous. And, the low inflation growth and the high economic growth may not be laudable right now.