November 2, 2012
The Ukrainian economy accelerated in May despite ongoing weaknesses in external demand. Private consumption, supported by a 15.5% yoy increase in real wages over the first five months of the year, remained the main driver of economic growth in 2012. Strong real wage growth was in part due to generous social spending from the budget in the run-up to parliamentary elections and easing price pressures. Retail sales, a substantial portion of consumer spending, picked up by 15.5% yoy over January-May 2012. The improvement in May’s real sector performance was also supported by solid growth in agriculture as well as resumed growth in construction and industrial sectors. Thus, agricultural production continued to expand, recording a real increase of 1.5% yoy over January-May. The expansion may be attributed to larger sown area under string crops and a solid advancement in animal farming.
Public and private spending related to the Euro 2012 football championship may explain a rebound in the construction sector, which expanded by 0.3% yoy in real terms over the period, following a 3% yoy decline in January-April. Industrial production rose by real 1% yoy in May compared to a flat output a month before. The main contributions to the sector’s growth came from the chemical industry, thanks to strong domestic and overseas demand for fertilizers, food processing and production of electricity. Improvements in these industries helped offset worsened performance in metallurgy, machine-building and oil-refining over the month. Despite May’s signs of a gradual activity pick up, we expect the Ukrainian economy to continue growing at a moderate pace, principally as a result of sluggish external demand and tight domestic credit conditions. Moreover, due to a deepening Eurozone crisis, and sharper slowdown in the Asian countries and North America, the real GDP growth forecast was revised down slightly to about 2.0% yoy in 2012.
Inflation pressures continued to ease in Ukraine with year-on-year deflation reported for May and June. Thus, consumer prices were 1.2% lower in June 2012 compared to the respective month last year. In addition to lower cost for foodstuffs, the decline in the consumer price index also reflected declining fuel prices. Considering price developments for the first half of 2012, our yearend inflation forecast was adjusted downwards to 5% yoy. Tight monetary policy also contributed to the decline in inflation. Aimed at containing the recently intensified Hryvnia exchange rate pressures, the NBU intervened in the foreign exchange market by selling its gross international reserves and tightened banking sector liquidity to raise demand for the Hryvnia. While these measures helped to stabilize the Hryvnia exchange rate at about UAH 8.08-8.1 per USD during June, they constrained Hryvnia supply in the economy, further undermining credit growth.
The Balance of Payments situation was uneven during May, although monthly data still reported a favorable picture. Thus, due to acceleration in exports and growth moderation in imports, Ukraine’s foreign trade deficit narrowed to $0.8 billion in May. Moreover, thanks to strong foreign currency inflow (mainly on account of trade credit and other short-term capital), the Balance of Payments stayed in surplus for the third month in a row. However, high external debt payments due at the end of May and in June and concerns over the vulnerability of the Ukrainian economy to external shocks amid a deepening Eurozone debt crisis generated high demand for foreign currency since the second half of May. The NBU has mitigated these pressures at a cost of lower international reserves, which fell by 4.7% in June from the previous month. In June, the NBU announced a gradual shift towards a more flexible exchange rate regime, although greater details on the move are still not available. At the same time, the NBU has been taking measures to reduce the reliance of the Ukrainian economy on the US dollar by entering into currency swap agreements with China and Russia. With some of foreign trade contracts settled in local currencies, these efforts can help reduce domestic US dollar demand and the cost of bilateral trade.
Ukraine macroeconomic situation. June 2012