Inflation eased to 10.5 per cent year-on-year in April from 14.1 per cent in March, and a monthly report from HSBC expects headline inflation to fall to a single-digit level by May.

The rate had peaked at 23 per cent last August.

"Headline inflation rose the least in the past three years, with prices in April rising by only 0.05 month-on-month versus 0.2 per cent in April," the report says.

"With demand even more subdued than … previously expected, inflationary pressures should ease even more meaningfully, with the year-average decreasing to 9.8 in 2012 from a previous estimate of 11 per cent."

The sharpest decline came in food inflation, which slowed to 11.9 per cent in April from 17.8 per cent in March. With food making up almost 40 per cent of the CPI basket, ample food supply coupled with low demand has driven down food inflation significantly.

Core inflation, which excludes volatile items like food and energy, fell to 10.3 per cent in April from 12 per cent in March.

While the Government has been successful at dampening demand to slow down inflationary pressures, it has also pressed the brake on growth more than expected.

In the first quarter, growth slowed to 4.1 per cent, with the services sector slowing the most. On a quarter-on-quarter basis, GDP contracted the most in the decade, shrinking by 2.5 per cent, seasonally adjusted, from an expansion of 2.9 per cent in the previous quarter.

The slowdown reflects tight credit conditions. With loans outstanding falling in real terms in 2011 and contracting in the first quarter of 2012, businesses and production have suffered.

Housing and construction saw the largest decline, as high lending rates hurt demand.

In other industries, activity slowed down significantly due to limited access to capital, with thousands of businesses shutting down or suspending operations due to high funding costs.

Import slump

The divergence between export and import growth highlights the sharp slowdown in domestic demand. Year-to-date exports rose 22.1 per cent while imports only grew 4.4 per cent.

As a whole, while exports have decelerated since 2011 due to a slowdown in China and a recession in Western Europe, they have held up thus far due to high commodity prices as well as relatively strong demand from the US and Japan.

The HSBC expects exports to expand by 17.7 per cent for the whole year, down from our initial estimate of 22.9 per cent. External demand will likely hold up due to a gradual recovery in China as well as stronger than expected growth in the US.

On the supply side, however, with many firms having limited access to capital due to high borrowing costs, production of goods will likely be affected.

Additionally, with the dong stabilising, Vietnamese exports are losing some competitiveness. Viet Nam should see its exports decelerate this year, although the rate of growth would still be elevated, it said.

However, the most worrisome deceleration is not in exports but imports. While slower import growth is needed to rein in the trade deficit, the weak growth number suggests that domestic demand is low.

With most of Viet Nam's imports used for production rather than consumption, low import growth suggests that businesses are cautious and are expecting very low demand in the months ahead.

The trade deficit is expected to improve significantly to US$4.6 billion from $9.8 billion last year.

Retail sales, which have been resilient, are decelerating, suggesting that spending would continue to be slow.

Growth in private consumption is expected to decelerate to 4.3 per cent this year.

With economic growth decelerating more than expected (the government is considering revising its growth forecast for 2012 from 6-6.5 to 5-5.5 per cent according to reports) and inflation cooling rapidly, the State Bank of Viet Nam is expected to continue easing monetary policy in the coming months.

The Government will also try to encourage credit growth in the economy through administrative measures as well as preferential credit treatment to key sectors.

While these measures should filter through and speed up growth in the coming quarters, the adverse effects of tightened credit conditions have already been felt in the first quarter.

Source: VNS