Why Ukraine's economic slowdown is a natural process

Author : Oleksiy Kushch

Source : 112 Ukraine

The reason for the seasonal cooling of economic activity and episodic growth is connected with the raw model of the economy
13:15, 6 December 2018

Ukraine’s expert community has long been thinking of a deserted mirage, dreaming about the times when the Ukrainian economy would grow by 5-7%. Although the figure of 5% of GDP growth appeared not by chance. If we want to reach back the level of 2013, our “speed” should be 5% annually. But such high dynamics requires implementation of completely different models of economic growth, while our authorities use only one model – rental, monopolized, repressive economy. Although the government is not tired of drawing rosy schemes, voicing plans to accelerate GDP growth to 4% +.

And this is confirmed by the official statistics. The economic engine is gradually cooling down. It is difficult to say, what is primary and what is secondary here. Just like in a riddle about what came first, the chicken or the egg. We could say that the slowdown is a consequence of the National Bank’s (NBU) monetary policy, which sharply increased the discount rate and blocked the lending stream to the real sector.

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In fact, the reason for our seasonal cooling of economic activity and episodic growth is connected with the source and raw model of the economy, when Ukraine’s economy "grows" along with the markets of metal, grain, and ore.

Compared with the first quarter of 2018, GDP accelerated from 3.1% to 3.8% in the second quarter. But in the third quarter of this year, a sharp slowdown in economic growth occurred. The dynamics of the gross product amounted to 2.8%, that is, 1% lower than a quarter earlier. Quite a serious claim for "failure," right?

Ideally, producers’ prices should be slightly higher than the consumer inflation. This suggests that the aggregate demand for resources from industrial consumers is growing, and, consequently, the economy is moving along an upward trajectory. For Ukraine, this model has generally become usual. We have the highest GDP growth in those periods when industrial prices are rising in double digits (most recently this indicator exceeded 30%). This could be explained in very simple terms: if world prices for raw materials increase (metal, ore, grain), then this growth is inevitably retransmitted to industrial inflation indicators and with a very short time lag, converted into gross domestic product growth. Over time, this inflationary flow from the segment of industrial prices goes into the consumer.

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But a strong gap between industrial and consumer prices is also harmful: production costs are rising, and the change in prices for final products is far ahead of the cost that the population is willing to pay. Partially, this gap is closed by the growth of nominal household incomes, but on the whole, too much plug can slow down domestic consumption. Ideally, this gap in Ukraine should not exceed 5%. But the situation is even worse when consumer inflation exceeds producer prices. This suggests that the cost of basic resources for this type of economy is declining, and since these resources are raw materials, consequently, global demand for our exports is falling. The classic phase of “economic overheating,” followed by a slowdown and, possibly, a recession, with a corresponding release break. In October this year, the dynamics of industrial prices declined to 0.3%, while consumer inflation went 1.7% up in Ukraine.

This thesis is confirmed by a comparison of the dynamics of exports and imports. Over the past ten months, export growth rates have declined from 23.5% in January to 10.3% in October, that is, more than doubled. At the same time, the dynamics of imports also fell from 31.7% to 16.1%, but in general, the dynamics of import growth is one and a half times higher than the same indicator for exports. As a result, the negative trade balance will exceed $ 10 billion this year. A similar situation was observed in 2008 and 2013, on the eve of known crises.

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After all, there are not enough resources to cover the trade gap in the structure of the balance of payments; in fact, the balance on the financial account in terms of loans we have a threatening trend in anticipation of the payment of a large part of external debts. Foreign direct investment in the first nine months of 2018 amounted to only $ 1.7 billion, which corresponds to the investment level of the country at the beginning of 2000. The only hope is labor migrants’ cash flows. The government seems to have no other reliable source of closing the gap in the balance of payments...

The so-called electric and transport methods are one of the alternative estimates of the dynamics of GDP growth. It is based on the thesis that economic growth is inevitably accompanied by an increase in freight traffic and an increase in electricity consumption. This year, freight turnover fluctuates in the range of 90.7-97.4%, that is, at a level lower than last year, which indicates that the growth of our exports is still achieved mainly due to a temporarily favorable price factor, not a drastic increase in physical volumes.

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Last year, one of the drivers of GDP growth was trade and construction. This year, the retail trade turnover in January-September was 105.4% over the same period last year. There is a gradual attenuation of this "stimulator." As for construction, after hyperactive last year dynamics (26-46%) this year we witness quite moderate rates of up to 6%, which means that the “bubble” in the primary real estate market has almost busted, and only the lack of mortgage reduces the overall level of systemic risk.

The key "emerging" element of GDP is industrial production. Still, we have not yet got out of the industrial phase of development. Here, the dynamics demonstrate the minimal indicators: a reduction in the growth rate from 103.6% in January to 101.8% in October.

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The above figures once again confirm the economic background of the well-known fable about the dragonfly and the ant. Governments is generating a naive expectation of an eternal summer and the belief that everything will be good; however, sooner or later it comes to the "winter" finish.

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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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