Vietnam Economic Growth Slows to 5.4% .

By NGUYEN PHAM MUOI

HANOI—Vietnam's year-to-year economic growth slowed in the first quarter as agricultural output slowed, although economists say the lull is likely temporary and that further monetary tightening will be needed to as surging inflationary pressures persist.

Gross domestic product expanded 5.4%, compared with growth of 5.8% in the same period a year earlier, the General Statistics Office said in a statement.

The figure represents a significant slowdown from the fourth quarter of last year, when GDP expanded 7.3% year-to-year. The economy grew 6.8% during the whole of 2010.

Vietnamese authorities recently announced a shift from its long-standing focus on growth, caving in to increasing internal and external demand for policies that promise greater stability as the economy continues to be pounded by surging inflation and a rampant trade deficit.

The government has said it will tighten monetary and fiscal policies, such as by trimming public investment and the budget deficit, boosting domestic production and rebalancing trade. Its credit-growth target will also be lowered to under 20% from 23%.

Moreover, the central bank raised two of its key policy interest rates this month to help battle inflationary pressures, and devalued the dong by 8.5% against the U.S. dollar on Feb. 11 in its fourth devaluation in 14 months.

"The tightening measures have gained traction surprisingly quickly, but we expect activity to start accelerating again into the second quarter," said HSBC economist Sherman Chan.

She said with economic pressures still evident, the government is expected to announce more tightening moves in the coming months, including some interest-rate increases along with possible measures related to bank lending. HSBC is forecasting GDP growth of 6.8% this year, compared with the government target of between 7% and 7.5%.

Imbalances in the economy were further highlighted last week, when data showed that inflation surged 13.89% in March compared with the same month a year earlier—the fastest year-to-year pace since February 2009. Such sharp rises in consumer prices will make it difficult for authorities to cap this year's inflation at their target of 7%.

Vietnam's persistently high trade deficit also widened to $1.15 billion in March from a revised $1.11 billion a month earlier, official data released Tuesday showed.

"Since [the first quarter] is typically the lowest growth quarter of the year, we do not think the authorities are in a position to relax macro policies given today's data release," ANZ Bank said in a research note. "Indeed, we think that year-on-year GDP growth will rise in the coming quarters, albeit at decreasing rates as the monetary tightening measures taken to date begin to bite around mid-year."

It added that if the authorities keep tightening policies and are able to keep real interest rates and inflation expectations under control, economic growth for 2011 should be below 6.5%.

The General Statistics Office said that during the first quarter, the agriculture sector grew just 2.05%, industry expanded 5.47% and the services sector grew 6.28%.

Write to Nguyen Pham Muoi at phammuoi.nguyen@dowjones.com