How and why will Ukrainian economy grow in 2017?

Author : News Agency

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Recovery of the purchasing power of households will be affected by the budgeted in 2017 increase of the minimum wage, which should stimulate the growth of wages in the whole economy
21:37, 27 December 2016

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The ICU Group assesses the GDP growth in Ukraine in 2016 at a rate of 1.5-1.6%, and forecasts economic growth of 2.3% in 2017. In 2018, GDP growth will accelerate to 3%, and from 2019, the economy will rise to the average annual growth rate of 4%.

The main driver of the economy in 2017 will be the growth of domestic demand, which will be provided by keeping the share of public expenditure at the level of 30% in relation to GDP and the growth of investment in fixed assets.

The increase in government spending through the budget – is a key element in the maintenance of domestic demand in the economy. Export-oriented sector in the current conditions can’t yet be an accelerator of economic recovery, that’s why the government has taken measures to increase domestic demand, including consumption, which accounts for 68% of GDP today.

Domestic demand will be provided by the domestic supply of goods or services. In addition, we should expect recovery in consumer households’ abilities. This is good news for the construction, engineering industries and their adjacent segments.

Thus, the recovery of the purchasing power of households will be affected by the budgeted in 2017 increase in the minimum wage, which should stimulate the growth of wages in the whole economy.

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The increase in the minimum wage in 2017, we estimate as a positive step using which government is trying to reverse the trend of the last two years, when the share of wages in GDP income dropped to a historic low (38.3% in the third quarter of 2016). At the same time, the share of profit of economic entities of all forms of ownership is at its maximum (45%). Before the economic crisis of 2014-2015 years this proportion was 54% / 36% respectively. That is, in the 2014-2015 biennium double economic compression happened - the volume of nominal GDP reduced, and at the same time the part that was accounted for wages, decreased.

Until the end of February, inflation will be at 12%, and then will start to slow down. NBU (National Bank of Ukraine) will have space to reduce discount rates - it will reduce them moderately during the year to the level of consumer inflation + 2 percentage points.

The situation on foreign markets will not have a significant impact on supporting the Ukrainian economy due to the prolonged economic crisis in the CIS countries (suffered a number of devaluations and recessions) and political risks in the EU, where the economy is growing, but at a moderate pace.

Ukraine will have to rely on internal forces, domestic sources of growth. Firstly, at the financial markets dominate the strengthening of dollar and uncertainty about Trump's policy in international trade.

Secondly, the raw material prices under a pressure will move down after the recent increase. Strong dollar factor increases the risk of financial crisis exactly in developing countries that were built up foreign currency debts in the private sector.

The adopted Ukraine’s budget for 2017 corresponds to the moderately optimistic scenario of economic development. Budget expenditures were formed so that the fiscal deficit was at the level of 3.5%. This indicator in combination with other indicators (real GDP growth, inflation, interest rates on the public debt) shows a stable situation in the field of public finance. The government will finance the budget deficit at the expense of internal and external sources. But the best way would be use of the domestic financial market for this purpose.

Exactly the issue of UAH government bonds should be a key instrument to finance the budget deficit, instead of the currency or index-linked government bonds and Eurobonds. Precisely this policy, coupled with an increase in real GDP and moderate inflation provides a gradual reduction in public debt levels and restore the country's creditworthiness in the eyes of foreign creditors.

However, there are certain constraints: the need to refinance previous currency debts and the unavailability of private and public sector to transit the exchange rate policy to its greater flexibility in both directions.

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