Why GDP growth slowed sharply and what will happen to Ukrainian economy in 2020?

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The potential for further growth of the Ukrainian economy is limited. The National Bank forecast of 3.5% in 2020 initially looked overly optimistic, but now it seems simply unrealistic
21:36, 17 February 2020


GDP growth slowed sharply in Ukraine. According to the results of the 4th quarter of last year, the gross domestic product level raised by only 1.5%. For comparison: in the first quarter of 2019, GDP grew by 2.5%, in the second - by 4.6%, in the third - by 4.1%. As you can see, at the end of the year, the domestic economy set a kind of anti-record. GDP growth was minimal, starting from the first quarter of 2016.

Such results are contrary to the promises of Prime Minister Oleksiy Honcharuk, who announced the possibility of 40% GDP growth in five years.

There are no updated data for 2019 yet. The government still maintains its previous forecast of GDP growth at 3.3% in 2019. But the State Statistics Service will publish an expanded report only in March this year. It is possible that the failure in the fourth quarter will affect the final indicators.

Note that the government was aware of a slowdown in the fourth quarter as early as December, but it was believed that it would still be about 2%.

This was said by Prime Minister at the famous wiretap of the meeting with the National Bank and the head of the Ministry of Finance.

“Here, in the fourth quarter, economic growth will sag. It was 4.4. And now it will be, according to some estimates, 2. And [statements will be made]: we, so to speak, failed the reform economy. With strong business executives it was 4.6. And the Soros people came and the economy grows 2 and goes down. And you can’t prove anything,” Honcharuk gave an alarming forecast.

As a result, as we see, it turned out things are even worse - the economy grew by only 1.5%. That is why questions to the “Soros people” (the so-called economic wing of the government oriented toward Western structures and the IMF) really arise.

There are many reasons for the sharp slowdown in the domestic economy. Starting from the recession in the industry and ending with a very exotic ones. Thus, the Minister of Economics Milovanov attributed the decline in GDP growth to atypical harvest dates.

At the same time, a significant decrease in growth rates is also due to government policy.

But the most important thing is what will happen to GDP next. And will the fourth quarter of 2019 anti-record grow into a trend of 2020?

And in this case, the National Bank’s forecasts of a 3.5% GDP growth in 2020 may turn out to be unattainable.

GDP and weather

Economy Minister Tymofiy Milovanov calls the slowdown in GDP growth at the end of last year "predictable and expected." The main reasons for it are a decline in industrial production, including due to unfavorable global conditions, as well as “not quite normal harvest dates for cereals and other crops” and an unusually warm winter.

The head of the Ministry of Economic Development wrote about this on his Facebook page.

"At the end of the year, the economy slowed down a bit. It was predictable and expected. Why did it happen? There are several reasons: the harvesting dates for cereals and other crops are not quite ordinary. Decrease in industrial output in the fourth quarter," Milovanov noted.

It should immediately be clarified here that Milovanov’s “climatic” argument is partly justified, although greatly exaggerated. According to economist Viktor Skarshevsky, harvesting is really taken into account in terms of GDP growth for the current quarter. Due to warmer weather, the harvesting campaign last year fell in the third quarter, which explains the relatively high GDP growth rate for this period - 4.1%. Although at that time, industrial production had already gone to a steep peak.

Accordingly, in the 4th quarter, the yield factor was already taken into account. In 2018, on the contrary, the crop was counted mainly in the GDP growth indicators for the 4th quarter.

But, according to Skarshevsky, the crop in any case could not drastically adjust the GDP figures. "These are tenths of a percent, not more. Even if it was calculated in the 4th quarter, then growth would be up to 2%, that is, there would still be a slowdown," he explained.

Three shocks for industry

According to Skarshevsky, the main factor in the GDP failure at the end of last year is still a decline in industrial production, which began in the summer.

Industry in the GDP structure accounts for 23-24%, including 12% for the processing industry, which last year fell at the fastest pace.

According to the State Statistics Service, in December last year, industry fell by 1.1%, compared with November 2019 and by 8.3%, when compared with December 2018. At the same time, the mining industry decreased by 9% compared to 2018.

The fall in industry in 2019 was 1.8%. For comparison: in 2018, in relation to 2017, on the contrary, an increase of 1.6% was recorded.

Processing industry last year decreased by 2%, textile, clothing and footwear - by 9.9%, woodworking and printing - by 5.8%, metallurgy - by 3.1%, engineering - by 5.6%, production of electrical equipment – by almost 20%, car production - 9.7%. There is an increase in the production of furniture (by 0.2%), computers and optical products (by 4.3%), drugs (by 5.1%), chemical industry (by 3.3%), food (by 0.2%)/ But, as you can see, successes in these sectors did not allow to block the general minus.

There are several reasons why the domestic economy has been falling for more than six months.

And the unfavorable world situation, which the government is blaming, is only one of them. Even in metallurgy, which most strongly felt the negative trends in the world market, this is far from the only factor in the collapse.

“Our economy experienced three shocks at once last year. The first shock was the deterioration of the situation on world markets. The second was the atypical hryvnia appreciation due to the government bonds pyramid. The national currency strengthened by 15%, which, against the background of a sag on world markets, made our products less competitive at a price. This hit especially hard on sectors with low profitability, for example, light industry, woodworking, electrical engineering. In light industry, which works with a profitability of 10-20%, hryvnia appreciation generally “ate” all the profit. Third factor is inflation", - says Oleksiy Kusch.

In mechanical engineering, according to Skarshevsky, the recession accelerated a further reduction in supplies to the Russian market.

Related: Ukrainian govt aims to increase country's GDP by 40% in five years

It turns out that the industrialists lost their incentives to increase production and investment in modernization. After all, their products are only getting cheaper, which means they cannot count on an increase in profits.

At the end of the year, industrial prices generally showed deflation.

Rampant shopping and food

So far, the industrial crisis has not reached trade. The contribution of trade to GDP, according to the results of 2018 (data for 2019 is not yet available) is 15.6%.

Last year, according to the State Statistics Service, retail trade grew by 12.1%, and in some regions even more. For example, in the Kyiv region - by 20%, Vinnytsia - by 18.6%, Ternopil - by 17.5%, Luhansk - by 16%. The impetus for the growth of trade was given by an increase in salaries and social benefits, as well as lower prices for imported goods due to the strengthening of hryvnia. But the structure of the trade turnover “spoils” automatically - the share of imports is growing in it.

This is already noticeable even on trading shelves in stores. Imported goods received noticeably bigger share even in the categories of social products, for example, inexpensive cheeses, milk. Domestic manufacturers complain that it is becoming increasingly difficult for them to compete with importers. Say, for cheeses, last year imports grew 1.7 times according to the Customs Service. The trade deficit is also growing, which last year reached a record high of $ 13.9 billion, which is four times more than in 2015. So far, we are covering this gap due to money transfers from citizens and government bonds, and also due to the growth of consumer lending.

“But this money goes mainly for the purchase of all the same imported goods, that is, domestic producers do not get any advantages. Therefore, they can’t increase investments and create new jobs,” Skarshevsky notes.

A significant contribution to the growth of Ukrainian GDP is also provided by agriculture - about 12%. But even there the situation is far from as brilliant as it seems at first glance. On the other hand, last year Ukraine received a record crop and was able to dramatically increase exports - by 40%. On the other hand, even despite grain records, by the end of 2019, agriculture turned out to be a plus of only 1.1%. Including plant growing grew by 1.3%, and livestock - by 0.5%.

The sector is being pulled down by subsidiary farms of the villagers, who traditionally occupy a large share in domestic agricultural production. So, according to the State Statistics Service, last year the personal households in crop production went down by 1.2%, and in livestock - by 3.5%. The consequences of this trend are well illustrated by the potato crisis in Ukraine last year. Citizens planted potatoes less than usual. And large farms could not block this decline. As a result, potatoes have risen in price at times, and they began to be imported in record volumes from Belarus and Russia.

Even the growth of production on large farms (by 2.9% in crop production and almost 5% in livestock production) did not allow agriculture to reach high growth rates last year.

In addition, it is also worth considering the quality factor. Ukraine really exports a lot. But these are mainly raw monocultures which are not very expensively valued on the world market. And we still do not sell many crops with high added value (berries, fruits, vegetables) abroad.

Other components of GDP growth are construction (2.7% of the total structure), as well as services. Including transport (7.5%), information technology and communications (4.6%), real estate transactions (7%) and more.

Construction last year increased by 20%, which became a kind of record. For comparison: in 2018, the industry outperformed only 8.5%.

But the record growth was provided mainly by budget injections in road construction.

The pace of housing construction, on the contrary, slowed down to a modest 3%. And this year it may be even less, as developers complain about the rise in price of building materials, an increase in the cost of work and, against this background, a decrease in consumer activity.

A strong hryvnia made housing in new buildings too expensive in terms of dollars. Therefore, many potential buyers who keep their savings in foreign currency decided to postpone the housing until better times. Loud scandals in the construction market, for example, with the company Ukrbud, only accelerated this trend.

The State Statistics Service has not yet provided data on the services market for the 4th quarter of last year; they will appear at the end of this month. In the third quarter of 2019, the volume of services sold increased, compared to the same period last year, by 6.2% - to 237 billion hryvnias. This is more than in the previous quarters of 2019 (in the first growth was 2.7%, in the second - 3.5%). But now it’s clear that services cannot save the general situation with GDP.

What will happen to the economy in 2020

The main intrigue is what will happen to the Ukrainian economy next. National Bank predicts GDP growth for this year at 3.5%. But it is not yet clear how achievable this bar is. On the one hand, global conditions continue to deteriorate. Coronavirus in China (and this country holds 16% of global GDP) may provoke a new economic crisis, which risks severely impacting the prices of our export products.

On the other hand, domestic industry, which makes the main contribution to GDP, continues to fall. And while the state does not take any measures to save it. Although the Ministry of Economy at the end of last year announced the creation of a headquarters for saving the industry, it never started working.

“All measures that could lead the industry out of the crisis go against the wishes of the IMF. For example, easing fiscal policy, developing industrial parks, creating a credit and export agency that could help our exporters. Therefore, most likely, they will never be realized,” said Skarshevsky.

According to Oleksiy Kushch, the state should not only launch an industrial policy program, but also change monetary and fiscal policies. In particular, to abandon the "government bonds pyramid" and the artificial strengthening of the hryvnia. But this is not happening yet. As a result, according to the expert, in the first quarter of this year GDP may also not show the best results and grow by 1-1.5%, the expert believes.

“According to the results of the first quarter of 2020, the situation on the world market may worsen. Due to quarantine, about 80% of the entire Chinese economy does not function, and a lot will depend on how soon coronavirus can be defeated. If the plants can recover their work in the coming days, then the pace of China’s GDP growth may drop to just 5.1% this year, otherwise the damage could be significantly higher: in the first quarter, GDP is quite capable of falling by 0.4%. The current situation has led to disruptions in industrial enterprises around the world due to the destruction of the supply chain.

Under such conditions, the potential for further growth of the Ukrainian economy is limited. The National Bank forecast of 3.5% in 2020 initially looked overly optimistic, but now it seems simply unrealistic. Most likely, GDP growth in the first quarter will be at the level of the same period in 2018 - 2.5%, and by the end of the year it will increase by no more than 3%. There are no serious reasons for the restoration of the global economy, while the likelihood of a full-fledged recession is only increasing," summed up the TeleTrade analyst Serhiy Rodler.

Related: Ukraine's GDP growth in Q4 2019 slowed to 1.5%

Related: Ukraine's real GDP in Q3 2019 rises by 0.6 percent in comparison with previous quarter

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