Still uhandohali. Why Ukraine has slowed sharply GDP growth and what will happen to the economy in 2020

Таки ухандохали. Почему в Украине резко замедлился рост ВВП и что будет с экономикой в 2020 году

Author: Liudmila Ksenz

Ukraine has sharply slowed the growth of GDP. By results of 4 quarter of last year gross domestic product came in, plus only 1.5%. For comparison: in the first quarter of 2019 GDP grew by 2.5% in the second – by 4.6%, the third with 4.1%. As you can see, at the end of the year the domestic economy broke some kind of record. GDP growth was the lowest since the first quarter of 2016.

These results are contrary to the promises of the Prime Minister Alexey Goncharuk, who announced the possibility of GDP growth by 40% in five years.

Updated data for 2019 yet. The government still keeps the previous forecast of 3.3% GDP growth in 2019. But the advanced report, the state statistics service will publish in March of this year. It is possible that the failure in the fourth quarter will have an impact on the totals for the year.

Note that the government was aware of the slowdown in economic growth in the fourth quarter in December, but I believe that will still be about 2%.

This was said Alexey Goncharuk in the famous wiretapping of a meeting with the national Bank and Minister of Finance.

“Here we are in the fourth quarter will shrink economic growth. Was 4 and 4. And now, according to some estimates, 2. And (gonna sound statements): uhandohali the economy of these reforms, so to speak, sorokata. With strong business executives was 4.6. And came Sarasate and the economy is growing and 2 down. Nothing can prove,” gave an alarming prognosis Goncharuk.

At the end, as you can see, it was even worse – the economy grew only 1.5%. But because the question “coronatum” (so-called focused on Western institutions and the IMF is the economic wing of the government) do arise.

The reasons for the sharp slowdown of the domestic economy a lot. Starting from the downturn in the industry and to the very exotic. So, the Minister of Economics Tymofiy mylovanov blamed the slowdown in GDP growth, including and atypical timing of harvest.

At the same time, in large part, the decline in the growth rate due to government policies.

But most importantly – what will happen to GDP further. And not escalate the record in the fourth quarter of 2019 to the tendency of 2020.

And in this case, the national Bank forecasts on GDP growth in 2020 is 3.5% may not be attainable.

“Country” understood why the Ukrainian economy began to slow down, and what to expect next.

GDP and weather

The Minister of Economics Tymofiy mylovanov calls the slowdown in GDP growth at the end of last year, “predictable and expected”. The main reasons for the deceleration of the economy – the decline in industrial production, including due to adverse global market and “not quite the usual time of harvest of cereals and other crops” and the atypically warm winter.

About it the Minister of economic development wrote on his page in Facebook.

“At the end of the year, the economy slowed somewhat. It was predictable and expected. Why did this happen? There are several reasons: not the usual time of harvesting grain and other crops. The decline of industrial output in the fourth quarter,” said Milovanov.

Here at once it is necessary to clarify that the “climate” argument Milovanova partly justified, though exaggerated. According to the economist Viktor Skarshevsky, the harvest indeed is accounted in the GDP growth for the current quarter. For warmer weather, the harvesting campaign in the past year occurred in the third quarter, which explains the relatively high GDP growth over this period was 4.1%. Although at that time, industrial production went into a steep dive.

Accordingly, in the 4th quarter of the crop factor already taken into account. In 2018, on the contrary, the harvest was credited mostly to the GDP growth for the 4th quarter.

But, according to Skarshevsky, the harvest is in any case could not dramatically adjust the figures for GDP. “It’s tenths of a percent, not more. Even if the harvest went into the calculations for the 4th quarter, the growth would be 2%, that is, it would still be slow”, – he explained.

Analyst at the Institute Growford Alex Kush calls explanation Milovanova about the warm winter and harvest “ridiculous.”

“Originally we had all the prerequisites for GDP growth to 4% for the year. Such forecasts are given, for example, the rating Agency Fitch. We have received a tremendous benefit by lowering energy prices. Oil, coal and gas last year were at price lows. With the deterioration of the world situation, which also refers to the government, explaining the slowing economy is also not so simple. The situation on world markets was multidirectional. For example, prices for agricultural products that Ukraine exports last year, however, increased by 20%. Prices for the ore, according to all forecasts, were supposed to stay at 60 dollars per ton. But then the accident happened on the Brazilian mine and the prices have soared to 120 dollars. Since the summer began their decline, but still quotes remained above projected – $ 90 per ton. In the whole year dipped metal prices. But even their reduction was not an avalanche. And even with a not very favorable global environment, some countries have good GDP growth. But not only Ukraine”, – says Alexei Kusch.

Three shock for the industry

The main factor for the failure of GDP at the end of last year, according to Skarshevsky, it’s still a decline in industrial production, which began even in the summer.

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

According to gosstat, in December last year, industry fell by 1.1% compared to November 2019 and 8.3%, when compared with the December 2018. While the mining industry has dipped, compared with 2018, 9%.

The fall of industry to 2019 amounted to 1.8%. For comparison: in 2018, relative to 2017, on the contrary, growth was 1.6%.

Recycling last year decreased by 2%, textiles, clothing and footwear – by 9.9%, wood processing and printing – 5.8%, metallurgy – by 3.1%, machine building – by 5.6%, manufacture of electrical equipment – by almost 20%, car production – by 9.7%. The increase is for the production of furniture (0.2%), computers and optical products (by 4.3%), drugs (5.1%), chemical industry (3.3%), food (0.2%). But as you can see, the success in these industries is not allowed to block the common minus.

Reasons why the domestic economy has been falling for more than six months, several.

And adverse global market conditions, which nod to the government, only one of them. Even in the steel industry, which is felt most strongly negative trends on the world market, this is not the only factor in the collapse.

“Our economy last year experienced three shock. The first shock of the deterioration of the situation on the world markets. The second atypical strengthening of the hryvnia at the expense of the pyramid of government bonds. The national currency has strengthened by 15%, which, amid sagging global markets has made our products less competitive in price. Especially hard hit industries with low profitability, for example, light industry, wood processing, electrical engineering. In the light industry, which operates with a margin of 10-20%, the strengthening of the hryvnia actually “ate” all the profits. The third shock is inflationary. As practice shows, developing a commodity economy like ours, slow down growth, if inflation is too low, less than 5%”, – says Alexei Kusch.

Here the following dependence: to raise prices for exports can be either due to the increase in world prices (which last year was not), or due to their price increase on the domestic market due to the devaluation of the hryvnia (which was not). “That is, if inflation were higher, say 10%, then the Steelworkers who lost 5% in volume, could mitigate this decline in the money if their products are more expensive in the domestic market. But this also did not happen”, – says Alexei Kusch.

In engineering, according to Skarshevsky, the recession has accelerated the further reduction of deliveries to the Russian market.

It turns out that the Industrialists are missing incentives for increasing production and investment in modernization. After all, their products are only getting cheaper, and then rely on the increased profits they can’t.

At the end of the year the industrial prices in General, there has been deflation.

“This means that this year, deflation can go on the retail price. That is, we risk a deflationary spiral: first, falling prices industry and retail rates, then companies are cutting capital investments, and cease to create new jobs. The next stage is downsizing. People deprived of income will be less to spend, therefore, will slow the growth of trade and services. And over all may the General economic recession. We have already passed two thirds of the way. And you can only guess what will happen next”, – says Alexei Kusch.

Unrestrained shopping and food

Until the crisis in the industry did not come to trade. She continues to pull the economy, says Skarshevsky. The contribution of trade to GDP, in 2018 (data for 2019 yet) to 15.6%.

In the past year, according to the state statistics service, retail trade increased by 12,1%, and in some regions even more. For example, in the Kiev region – 20%, Vinnytsia – 18.6%, Ternopil – 17.5%, Luhansk – 16%. The impetus for trade growth given the increase in salaries and social benefits, and lower prices for imported goods due to the strengthening of the hryvnia. But automatically “goes bad” and the pattern of trade is becoming more and more share of imports.

It is already noticeable even on the shelves in stores. Imported goods became significantly more even in the categories of social production, for example, cheap cheeses, milk. Domestic producers complain that they are increasingly difficult to compete with importers. For example, cheese imports last year, according to the Customs service, has grown 1.7 times. There is also a growing trade deficit, which last year reached a record high of 13.9 billion dollars, which is four times more than in 2015. While we cover this gap due to remittances from migrant workers and the pyramid of government bonds, but also due to the growth of consumer lending.

“But the money goes mainly to buy the same imported goods, i.e., domestic producers do not receive any advantages, therefore, are unable to increase investment and deliver new jobs,” – said Skarshevsky.

A considerable contribution to the growth of the Ukrainian GDP gives agriculture about 12%. But there the situation is not as rosy as it seems at first glance. With one hand, last year Ukraine received a record crop and were able to dramatically increase its exports by 40%. On the other, despite the grain records, at the end of 2019, agriculture went into a plus by only 1.1%. Including crop production has grown by 1.3% and livestock – by 0.5%.

Industry pulled down the farms of peasants traditionally held in domestic agricultural production a large share. Thus, according to the state statistics service, last year the private farms of the population on the crop went down by 1.2% and livestock – by 3.5%. The consequences of this trend is well illustrated by the potato crisis, which covered Ukraine in the last year. Citizens lost interest in horticulture and planted potatoes less than usual. And large farms this decline to block failed. In the end, the potato has risen significantly, and in record numbers started to be imported from Belarus and Russia.

Even the growth of production in large farms (crop production by 2.9%, livestock by almost 5%) has not allowed agriculture to reach high growth rates in the past year.

Besides here it is necessary to take into account the quality factor. Ukraine actually exports a lot. But it’s basically a commodity monocultures, forage on the global market are valued particularly expensive. And crops with high value added (berries, fruits, vegetables) we are selling abroad are not so much.

Other components of GDP growth – construction (2.7% in the overall structure), as well as services. Including, transport (7.5 per cent), information technology and communication (4.6 percent), real estate (7%) and so on.

The construction at the end of last year increased by 20%, which has become a kind of record. For comparison: in 2018, the industry will come out only by 8.5%.

But the growth record has been provided mainly by budget investments in the construction of the road.

The pace of housing construction, by contrast, slowed to a modest 3%. And this year may be even less, as the developers complain about the rise in price of building materials, the costs of the works and against this background, the decline in consumer activity.

Strong torque made the new housing is too expensive in terms of dollars. So many potential buyers who keep their savings in foreign currency, has decided to postpone the housewarming until better times or gone on the secondary. Scandals in the construction market, for example, with the company ukrbud, has only accelerated this trend.

Market data services for the 4th quarter of last year, the state statistics service does not give, they will appear at the end of this month. In the third quarter of 2019, the volume of services increased, compared to the same period last year by 6.2 percent to 237 billion. This is more than in previous quarters 2019 (in the first growth was 2.7% in the second and 3.5%). But it is now clear that the overall GDP services do not save.

What will happen to the economy in 2020

The main intrigue – what will happen with the Ukrainian economy further. NBU forecasts GDP growth for this year at 3.5%. But it is unclear how achievable this strap. On the one hand, the global situation continues to deteriorate. Coronavirus in China (as this country holds 16% of world GDP) could provoke a new economic crisis risks to hit hard on the prices for our export products.

On the other hand, the domestic industry, which makes a major contribution to GDP continues to fall. And while the state takes no measures to save her. Although the economy Ministry late last year announced the creation headquarters for the salvation of the industry, the work he has started.

“All measures that could bring the industry out of the crisis, are at variance with the wishes of the IMF. This, for example, the easing of fiscal policy, the development of industrial parks, creation of export Credit agencies, which could help our exporters. Therefore, most likely, they will not be realized”, – said Skarshevsky.

According to Alexei Kusch, the government must not only run the program for industrial policy, but also to change monetary and fiscal policies. In particular, to abandon the “pyramid of government bonds,” and the artificial strengthening of the hryvnia. But this is not happening. As a result, according to experts, in the first quarter of this year GDP may also not show the best results and grow by 1-1,5%, – the expert believes.

“At the end of the first quarter of 2020, the situation on the world market may deteriorate. Because of the quarantine was not functioning in about 80% of the entire economy of China, and much will depend on how soon we can win coronavirus. If the plants can recover in the coming days, the GDP growth in China fell to just 5.1% in the current year. Otherwise, damage may occur considerably higher in the first quarter GDP is quite able to fall 0.4%. The current situation has led to interruptions in the work of industrial enterprises around the world due to the destruction of the supply chain: due to lack of spare parts from China factories have to reduce activity. Against this background, collapsed prices on all major commodity products.

In such circumstances, the potential for further growth of the Ukrainian economy is limited. Forecast NBU 3.5% in 2020, originally looked too optimistic, but now it seems simply unrealistic. Most likely, GDP growth in the first quarter will be at the level of the same period 2018 – 2.5% and for the year it will increase no more than 3%. Serious reasons for the recovery in the global economy yet, while the likelihood of a full-fledged recession only increases”, – concluded the analyst TeleTrade Sergei Rodler.

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