Domestic Consumption and Export Growth: The gradual GDP recomposition in the next two years

Vietnam’s export-driven model has led many to compare it with China, its northern neighbor. In the 2000s and 2010s, the label “Made in China” was synonymous with the “Made in Vietnam” that we see nowadays in daily purchases. However, key distinctions remain.

Vietnam’s population and land mass are roughly 15 times and 30 times smaller than China’s. Vietnam’s geopolitical situation is also more favorable than China’s—despite its socialist government, its bamboo diplomacy has helped the country swiftly navigate between trading partners with opposing political ideals. Yet, perhaps the most important distinction is in GDP composition. Vietnam’s GDP composition (~55% domestic consumption, ~30% investment, ~8% net exports and ~8% government final consumption expenditure), while being disproportionately dependent on trade, is much more balanced than China’s economy, which has a much lower share of domestic consumption per GDP (40%) and a much higher share of fixed-asset investments (43%). [1] [2] While Vietnam’s economic model might indicate a lower steady-state level of output, or in layman terms, a lower GDP “ceiling”, its strong internal drivers ensure steady economic growth independent from external market volatility. As we pivot towards 2025, the fully-fledged advantage of having these internal forces becomes more evident in a tenser global environment marked by tariffs and deglobalization trends.

Vietnam’s exports will likely see a marked decrease towards the end of 2025 and 2026. The most predictive indicator for its projected performance would be to look at the US, its largest trading partner (29.5% of Vietnamese exports). Current estimates for US retails sales in 2025 are optimistic. The ISM Supply Chain Planning Forecast in December recorded over 60% of respondents expecting a projected 4.2% increase in gross revenue compared to the estimated 0.8% increase in 2024.[3] This, combined with front-loading tendencies before the inception of Trump’s policies, the gradual phasing-out of a destocking cycle which started in March 2023, and improving new orders that hit a 7th month high, will likely point to improvements in inventory levels as they hit new lows. Given that a significant segment of Vietnam’s high value-add exports is manufactured products (electronics and machinery), it is likely that export growth remains strong in the first two quarters of 2025 before Trump tariffs will be enacted.

Fig 1. The white line is the moving average of US manufacturing business inventories, while the purple line is New Orders for US-based Manufacturing Companies. The sector above the red line represents expansion, while the sector below represents retraction. The data points to a possible reversal in inventory trend as new orders pick up. Source: LSEG Economcis

Fig 2. A more granular look on ISM Manufacturing New Orders. November’s figure is the first increase in orders in 7 months. Source: Trading Economics

The differential between inventories and new orders is expected to close in the latter half of 2025 and converge in 2026 following the gradual replenishment of stock, reaching a new equilibrium of decreased demand for manufactured goods from overseas. However, strong FDI performance and continued interest in improving Vietnam’s manufacturing base by moving towards high capital-intensive sectors will improve the quality of exports, mitigating the decrease in volume. Vietnam’s export-driven engine will therefore see a moderated decline from lagging performance in the tail end of 2025 as protectionist ideologies begin to take hold in the real economy.

Vietnam’s export-led growth model is fundamental for its economic success. The country relies on foreign exchange and trade to improve its manufacturing capacities, and benefits enormously from its productive capacity that its domestic economy cannot sufficiently digest. It is also well-positioned geopolitically to replace China, the go-to destination for affordable exports. As long as Vietnam plays catch-up growth and maintains the objective to become an upper-middle income country by 2030, trade is a foundational lever that it will not sacrifice.[4]

As exports face headwinds in upcoming years, it is expected that other sectors will play a more important role in motivating growth. The most important resource would be economic self-reliance. Vietnam’s domestic economy is strong: domestic share of GDP stands at 54.4% in 2023, which is near the OECD average of 59%.[5] A burgeoning middle-class, rapid urbanization, and the recovery of the real estate sector are principal catalysts for greater consumption in the future.[6] [7] However, recent growth has been sluggish due to fierce anti-corruption crackdowns, relatively high inflation, and high interest rates.[8] [9] This is expected to subside in 2025 and 2026, given that policy rates have edged lower and might decrease even more to prop up the ailing financial and real-estate sectors. Additionally, the country emerges from the most intense phase of its anti-corruption campaign.

Recovery is already seen in recent results: Q3 YoY private consumption growth in 2024 was 7.02%, while retail sales of consumer goods and services increased by 8.4% over the same period last year.[10] Consumer confidence is also higher than regional peers.[11] However, such consumption growth is selective. Despite increasing household wealth, the average Vietnamese consumer has become increasingly product-conscious and financially prudent.[12] A larger proportion of the population—compared to regional averages—save or invest their money, driving the demand for financial services.[13] There is also a greater tendency to shop online, which is further accelerated by the young demographic makeup and the robust network of existing e-commerce suppliers such as Shopee, Lazada and Tiki.[14] [15] Lastly, Vietnamese consumers are highly discriminatory: over 91% of shoppers engage in environmentally responsible shopping practices, and local/regional brands have gained popularity amongst the middle class.[16]  High inflation before August has resulted in mitigated consumption for income-elastic goods such as luxury and entertainment, while there has been significant spending increases in healthcare (48% YoY) and groceries (63% YoY).[17] This is likely to be transitory as inflation eases, and we can expect increased discretionary purchases as the real-estate sector shake off a 2-year downturn and is poised for a comeback.

 Fig 3. Residential real estate makes a comeback in Vietnam. Source: Statista

This is pivotal for the average Vietnamese, given that property ownership is greater than 80% (one of the highest in SE Asia), and other wealth-accumulation vectors such as public equities and bank deposits pale in attractiveness to the explosive growth in residential property prices.[18] It is therefore advisable to allocate greater capital share to consumer discretionary goods, particularly in sectors that cater to the modern Vietnamese taste: local, environmentally friendly, and digitally integrated.

In the next two years, it is probable that we shall see a gradual rebalancing in the sectors of domestic consumption and trade. This shall reverse a trend of declining domestic consumption share since 2015 as Vietnamese external trade boomed under worldwide adoptions of “de-coupling” and China +1 strategies. This shall provide a valuable opportunity for domestic enterprises to develop and refine their products.

References

[1] CEIC Data. (n.d.). Private consumption as a percentage of nominal GDP in China.

[2] CEIC Data. (n.d.). Investment as a percentage of nominal GDP in China.

[3] PR Newswire. (2024, December 15). ISM reports economic improvement to continue in 2025.

[4] VnEconomy. (2024, December 10). How could Vietnam be among top 30 largest economies by 2030?

[5] OECD. (n.d.). Household spending as a percentage of GDP.

[6] Ahn, L. & Pham, N. (2023, October 5). Vietnamese consumers are coming of age in 2023: How businesses can stay ahead. McKinsey & Company

[7] Maybank Kim Eng. (2023, November 20). Vietnam consumer trends 2024.

[8] Cimigo. (2024, September 14). Vietnam consumer trends 2024.

[9] Nguyen, T. & Tran, M. (2020, June 10). Survey: Vietnamese consumer sentiment during the coronavirus crisis. McKinsey & Company.

[10] General Statistics Office of Vietnam (GSO). (2024, November 15). Socio-economic situation in the third quarter and nine months of 2024.

[11] Vietnam Investment Review. (2024, December 18). Vietnamese consumer sentiment outperforms regional averages.

[12] Ahn, L., & Pham, N. (2023, October 5). Vietnamese consumers are coming of age in 2023: How businesses can stay ahead. McKinsey & Company.

[13] Vietnam Investment Review. (2024, December 18). Vietnamese consumer sentiment outperforms regional averages.

[14] Ahn, L., & Pham, N. (2023, November 9). The new faces of the Vietnamese consumer. McKinsey & Company.

[15] Tech in Asia. (2024, October 12). Vietnam’s Tiki appoints new CEO amid growing competition.

[16] Ahn, L., & Pham, N. (2023, November 9). The new faces of the Vietnamese consumer. McKinsey & Company.

[17] PricewaterhouseCoopers (PWC) Vietnam. (2023, August 15). Respond, rethink, reimagine: Strengthening consumer trust in Vietnam.

[18] Maybank Kim Eng. (2024, March 25). Vietnam Economics: How systemic is the property sector?