Stimulating household consumption vital for economy

(ĐTTCO) - The unexpected and sudden outbreak of the Covid-19 pandemic has caused a negative impact on the aggregate supply and demand in the economy in Vietnam.

(Illustrative photo)

(Illustrative photo)

This is very visible in the large numbers of workers being laid off in consumer industries such as restaurants and hotels, and with consumers also now turning towards home cooking as opposed to eating out. Workers too, in affected industries for example, have lost their monthly income and have cut down drastically on spending on non-essential goods and services.

For the Vietnamese economy, exports play an important role in increasing aggregate demand. However, the demand of goods for export depends heavily on markets that are currently the most affected by the Covid-19 pandemic such as the US market and the European market. This pandemic has therefore severely affected international trade, and demand for Vietnamese exports has plummeted to an all-time low. Export of goods and services fell 8.45% in the second quarter of 2020, and about 0.31% in the first six months of this year.

There is now also a huge decrease in demand for many goods within households, leading to a sharp decline in services such as tourism, transportation, warehousing, retail, education and training. Consumption only increased by 0.04% in the second quarter of 2020, as compared to 0.69% over the same period in 2019. According to current statistics, household consumption contributes to 80% of GDP. In 2019, household consumption added nearly 12% to GDP growth. Therefore, stimulating household consumption is being seen as an important solution in the current pandemic scenario.

Support for domestic consumption can be done by retaining and maintaining jobs for workers in affected enterprises, known as labor hoarding. To do this, the government needs to have support policies that directly focus on all affected businesses, such as by providing emergency loans, and with the Government playing the role of the final buyer. In the case of the airline industry, for example, if the demand for this industry drops below 80%, the government must be the one to shoulder this huge loss of revenue and help maintain stability in this important industry. This new form of social insurance must directly be aimed at severely affected businesses in the current volatile scenario.

Many believe that the Government needs to increase spending to support the economy and help increase aggregate demand simultaneously. However, it should be noted that an increase in government spending will have an income boosting effect in industries that are not so seriously affected, or sectors that are not directly affected by the pandemic. As a result, those workers in the region that are actually affected by the pandemic may not benefit from increased government consumption, an important factor that needs consideration prior to any decisions made by the government.

Dr. Tran Hung Son University of Law and Economics

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