Ukraine's industry on its way down

Author : Oleksiy Kushch

Source : 112 Ukraine

In January 2019, Ukraine's budget deficit reached 428 million USD. This is only the beginning of the fall in industrial production
20:20, 11 March 2019

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One of the most popular economic achievements of Ukraine’s current government over the past couple of years is the so-called economic growth. If we analyze the statistical data, our economy has been growing for 12 quarters in a row since 2016.

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However, this could be called an achievement only with a superficial glance at the figure of GDP growth. We should rely on the statistics as a base of comparison. Basic math knowledge enables understanding that when a relatively small number is in the denominator, a very modest figure can be put in the numerator to provide the required percentage increase. In 2014-2015, our economy totally fell by more than 16%. Even a microscopic increase in gross product gave moderate relative gains. In 2016, our GDP grew by 2.4%, by 2.5% in 2017, and by 3.2% in 2018. It turns out that in the three years of recovery, Ukraine was able to win back a little over 8% of the lost 16%, or half of the losses. In fact, we have not even reached the figures for 2013 (if we count the GDP in hryvnia).

By the way, is growth by 2-3% per year it a big or a small indicator? Last year, China showed a trend of 6.6%, and experts considered this almost the forerunner of a new economic crisis. According to analysts, the Celestial Empire will continue to increase its economic parameters by 6% + this year. According to IMF estimates, the focus of world economic growth in 2019 will shift towards India and the ASEAN-5 countries (Indonesia, Philippines, Thailand, Malaysia, and Singapore). The growth dynamics of India’s GDP in the coming year would be 7% +, and in the group of Asian countries mentioned above it would be 5% +.

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If we turn to the theory of the three-sectional structure of the economy, formulated by scientists Clarke and Fourastie, we see that the potential of the agrarian countries decreases as the global economic system develops, the industrial ones quickly increase and then decrease, while the post-industrial ones based on the tertiary sector are growing all the time (albeit slowly).

Such countries as Ukraine should develop at least at the level of 5%. Only this dynamic will allow, on the one hand, to successfully overcome poverty and save the country from labor migration, and on the other, to form an adequate reserve for future economic crises, which are precisely the developing markets that crash most. That is, our country, on the eve of a new global crisis, must not only win back the losses of 2014-2015 but also form a certain economic foundation.

But even such a small economic growth in Ukraine has quite specific sources of the formation. The driver that pulled our GDP in recent years was retail, which grew by 6-7% per year, providing a positive GDP dynamic. Plus a surge in the residential construction market, which began to slowly fade in 2018. Over the past three years, we have had a kind of hybrid economic growth, when GDP increased, but at the same time, the index of agricultural production and the indicator of industrial output went to the negative zone. At the same time, the gross product increased even when the basic economic indices were in the red zone. Trade and residential construction have actively stimulated transfers of labor migrants – a factor that is very variable and exogenous (external).

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In all the past three years of increasing GDP, we have rarely had moments when all three main segments of the economy grew simultaneously: trade, agricultureб, and industry. If last year we had record growth in the index of agricultural products at the level of + 7.8%, then in 2017 there was a drop of 2.2%.

Ukraine’s industrial production is doing a current "dive" into the red zone, which by the end of January of the current year has decreased by 3.3%. There was an increase of 4.3% in January last year. Then the January industrial surge was due to record rates of GDP growth in the fourth quarter of 2017. According to the domino principle, the price surge in the raw materials markets of our traditional exports has given impetus to growth in related industries. Then this result was completely confused during the year: the growth rate of industrial production fell first to 3% and then to 1.6-2%. And this year it went into the negative zone. Obviously, neither the government nor the National Bank managed to cope with its basic function of supporting the growth of the industry, especially since even by the standards of the current difficult time we had and still have such tools. Instead, the National Bank has redirected all the liquidity of the banking system to the government debt sector (government bonds and certificates of deposit, completely depriving the industry of leverage).

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In January of this year, the highest rates of decline were recorded in the segment of electrical engineering – minus 56% (this is actually not a fall, but a total collapse of the industry). Amid growing coal, oil, and gas production, iron ore production fell sharply (-7.1%), which is a key element of our commodity exports. Textiles have fallen by 9.7%, chemistry has fallen by 14.9% (in fact, this industry is being eliminated in the structure of our industry). The production of plastics and other mineral products decreased by 6.5%. Mechanical engineering fell by 11.9%, 8.2% decreased by the motor industry. Food production decreased by 1.9%. Metallurgy, the basis of our exports, decreased by 4.5%. Oil refining continued to decline (-3.6%), and even a moratorium on the export of roundwood did not save timber processing industry (a 5.9% fall).

The reasons for the decline in our economic dynamics are quite tangible. The factor of entry into the EU market, associated with launching the FTA, has already exhausted itself. When you get to a new sales market, you always catch a passing wave of new consumers and orders. It is difficult to keep afloat in a structured and competitive European market. Moreover, the state has done nothing to help Ukrainian enterprises in this adaptation: we have not earned export promotion programs, including within the framework of export credit instruments.

The fall of metallurgy and ore mining is dictated by the general situation in the global commodity markets. In January of this year, Ukraine dropped by one position and was on the 13th place in the world rating of steel producers (World Steel Association). But recently we were in the top ten. Italy, Taiwan, Iran, Turkey, and Brazil are ahead of us. Not to mention the leading countries.

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The largest reduction in industrial production in the structure of the main industrial groups was recorded in the segment of consumer durable goods – minus 13.8%. Investment products remained at zero growth, mainly due to orders of industrial equipment carried out by state-owned enterprises. Intermediate goods (semi-finished products) fell by 10.3%, and consumer goods for short-term use decreased by 2.1%.

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The decrease in metallurgy can be explained by the factors of the global markets, and the situation with the export-oriented industries could be explained by the slowdown of the European economy and effective demand in EU, which made our producers slide away from this complex market. Negative indicators of consumer goods production point to the reverse side of the FTA agreement with the EU: European goods began to simply eat up our domestic market, squeezing domestic producers out of it. European goods have already penetrated even into the segment of consumer goods of economy class, gradually displacing traditional Ukrainian products from there.

As a result, in January 2019, the state budget deficit reached 428 million USD. And this is only the beginning of the fall in industrial production.

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This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.  

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