bne IntelliNews – Ukraine’s economy takes off? Economic growth jumps to 4.6% in 2H19

Ukrainian observers were in turmoil on August 14 after the government announced that economic growth had surged in the second quarter, increasing 4.6%, the national statistics service Ukrstat reported on August 14, well ahead of even most expectations. more optimistic.

“It is time for the Ukrainian economy to take off as inflation has stabilized with a minimal budget deficit and tight monetary policy. The hryvnia exchange rate increased as desired to maintain the workforce in Ukraine. Finally, we are seeing reasonable growth, but property rights have to be guaranteed, ”said Anders Aslund, economist and senior researcher at the Atlantic Council, in a tweet.

The sharp rise was driven by a bumper grain harvest and surging grain exports that pushed Ukraine to overtake Russia as the world’s largest grain exporter for the first time in three years.

Rising consumption and slowly picking up income levels have also contributed to growth as the economy stabilizes after collapsing in 2015-16.

The 4.6% growth was well above Reuters’ consensus of 2.7% growth and was also up sharply from the 2.5% growth in the first quarter. The country’s real GDP in the second quarter of 2019 (taking into account the seasonal factor) grew 1.6% quarter-on-quarter.

Although the Ukrainian economy is recovering from its recent crisis, its growth is well below its potential and should have grown faster given the depth of its previous downturn.

The good results will add to the growing optimism that came with the election of Ukrainian President Volodymyr Zelenskiy and his Servant of the People Party (SOTP) who both scored overwhelming victories this year over the promise of change.

If Zelenskiy is lucky, then the heightened optimism will trigger a virtuous circle of investment-profits-wage increases-consumption that drove Russia’s boom years into the 2000s and allows Ukraine to finally capture some of its “catch-up” potential. Ukraine is the only large country in the former Soviet Union (FSU) that has not gone through this process and therefore remains the poorest country in Europe.

In July, the National Bank of Ukraine (NBU) revised its 2019 economic growth forecast to 3% yoy from its April macroeconomic forecast of 2.5% yoy. The NBU also revised its economic growth forecast for 2020 to 3.2% year-on-year from 2.9%. The revisions were attributed to “stronger domestic demand, more favorable terms of trade and expectations of a larger grain harvest”.

Domestic demand will remain the main driver of economic growth over the next few years. Private consumption growth will slow, but remain high due to an increase in real household income – wages, pensions and remittances from abroad. Capital investments will continue to grow rapidly, which will also provide significant support to the economy, the NBU added.

In this regard, Ukraine will follow its neighbors where the countries of Central Europe have managed to get rid of the effects of a notable economic slowdown in “old Europe” thanks to their strong domestic demand which has slowed down growth, bne IntelliNews reported yesterday. Ukraine has already started to reorient its economy from Russia to the west, but connecting with these vibrant economies just across the border will help move Ukraine forward.

But economic growth will be hampered by the weakness of global economic activity and a decrease in gas transits to “European countries from 2020, due to the construction of bypass pipelines,” the statement said.

Ukraine faces a potentially debilitating situation with Russia’s Gazprom this winter. Its gas transit contract expires, which could mean Russia will stop shipping gas to its European customers through Ukraine, which would cost the country some $ 3 billion per year, or 3% of GDP. Ukraine has pumped gas to underground storage at record levels to prepare for its next gas war, state gas company Naftogaz told bne in an exclusive interview.

In March, the Ukrainian Ministry of Economy revised downwards its forecast for Ukraine’s real GDP growth in 2019 to be 2.8% year-on-year compared to 3% year-on-year. The ministry is also forecasting growth in 2020 of 3.8% year-on-year and in 2021 of 4.1% year-on-year, according to local media.

In the same month, Prime Minister Volodymyr Groysman said the Ukrainian government is forecasting economic growth of more than 3% year-on-year in 2019.

The International Monetary Fund (IMF) kept its forecast for Ukraine’s GDP growth in 2019 and 2020 unchanged at 2.7% yoy and 3% yoy, respectively.

The European Bank for Reconstruction and Development (EBRD) has downgraded its forecast for Ukraine’s real GDP growth in 2019 to 2.8 percent year-on-year from 3 percent year-on-year. The multinational lender also predicts that the country’s economy will grow 3% year-on-year in 2020.

The EBRD believes that the large public debt payments planned for 2019-2020 represent a serious risk for Ukraine’s economic development. Therefore, maintaining cooperation with creditors remains vital for the recovery of the country’s economy.

Christi C. Elwood