By default, powerdns does not export /etc/hosts entries : https://doc.powerdns.com/md/recursor/settings/#export-etc-hosts
Configuration generated should include a export-etc-hosts=yes line by default, unless "ignore-hosts-file" is set.
This can be fixed by changing those lines : https://github.com/vyos/vyos-1x/blob/current/src/conf-mode/vyos-config-dns-forwarding.py#L162-L163