Consumer inflation continued to exhibit a downward trend – annual CPI inflation decelerated to 1.9% at the end of the first quarter (CPI inflation grew at a quarter-on-quarter rate of 0.7%, which was attributed to the non-core inflation.)
The core inflation plunged to a 10-year low of 0.2% in the first quarter of 2012, with the annual rate of core inflation down to 5.3%. Overall, demand-side factors put downward pressure on inflation developments, with a negative GDP gap growing to 2.5%, compared with 1.5% recorded in the previous quarter.
The non-core CPI rose by 1.1% due to increases in administratively-regulated prices driven by price rises for excisable goods of 2.0%, a 1.1% increase in house maintenance prices, seasonal price rises for raw foods of 0.8% over the quarter and fuel price increases of 2.5% (11.6% on a year-on-year basis) triggered by oil price rises in the global commodity markets.
Signs of recovery in external markets and prices rises for energy resources recorded in the domestic market triggered a 1.1% increase in the PPI in the first quarter of 2012, with annual PPI inflation continuing to decline to 6.5%.
GDP growth slowed down to 2% year on year in the first quarter of 2012 in the wake of unfavorable situation in external markets. The export-oriented industries were hurt, with the output of metallurgy and machine-building industries contracting most, which had adverse implications for industrial output and the value for exports of goods and services.
Reduced external demand was offset by robust domestic demand, which was driven by high growth rates of real wages (real wages increased at an annual rate of 14.7% in the first quarter). Private consumption expanded by 9.6% year on year, whereas retail trade turnover and the volume of services rendered grew by 14.2% and 14.1% year on year in the first quarter respectively.
An upward trend in the capital investments, which grew at an annual rate of 23.2% in the first quarter, points to heightened domestic investment demand driven by the increased government funding. Investments in machines and equipment prevailed within the total amount of investments (29.2%), which contributed to increasing the output of domestic machine-building industry and encouraged imports of capital goods. Following the lifting of export duties on grain at the end of last year, a revival of grain exports and consumption of natural gas from the Ukrainian underground gas storage triggered a considerable reduction in the stock of floating funds in the first quarter of 2012.
The first quarter of 2012 saw robust growth in both revenues and expenditures of the Consolidated Budget (by 16.8% and 17.1% respectively) against the backdrop of low inflation. The Consolidated Budget showed an initial surplus of 1.7% of GDP, pointing to persistent moderately tight fiscal conditions.
After reaching a peak at the end of 2011, the activity in the interbank and cash segments of the foreign exchange market slowed down in the first quarter of 2012, which could be attributed to seasonal factors and a decline in the delaluationary expectations.
The National Bank of Ukraine minimized intervention in the foreign exchange market. The market exchange rate fluctuated around UAH 8.03 per USD 1. The speculative sentiment eased, which led to a decline in the net demand for foreign exchange.
The interest rate policy pursued by the National Bank of Ukraine was aimed at maintaining bank liquidity at the optimum level in order to ramp up lending, which remained low.
In the first quarter of 2012, the current account deficit showed a deficit of USD 1.3 billion, having decreased 3 times, compared with the previous quarter. The deficit reduction was mainly due to a fall in the value of gas imports. When the average price rose by 59%, the physical volume of imported gas decreased more than twice. The value of gas imports fell by 23.6% year on year to USD 3.6 billion. An increase in exports of grain crops and machine-building products were additional contributors to the deficit reduction.
In the first quarter of 2012, the financial and capital account showed a surplus of USD 771 million. The financial account surplus was achieved mainly due to investments attracted and loans granted to the real sector.
The international reserves were used to cover a deficit in the consolidated balance of payments (USD 0.6 billion) and make the first loan repayment to the IMF (USD 0.6 billion). The international reserves amounted to USD 31.1 billion as of end of the first quarter, being sufficient to finance future imports of goods and services for 3.4 months.
The bumper harvest gathered in 2011, a slow rise in consumer demand and slight increases in administratively-regulated prices and tariffs will curb inflationary pressure this year.
A drop in prices for raw foods recorded in the previous periods will contribute to reducing the core inflation. Given its moderate dynamics, overall core CPI inflation is expected to stand at 5%.
The metal prices will remain almost unchanged, compared with 2011, and gradually decline in 2013. Oil prices are expected to remain stable. Ukraine will face deterioration in the terms of trade in 2012 triggered by price rises for imported gas.
In 2012, GDP growth is expected to slow down, as compared with 5.2% in 2011. However, GDP growth is expected to accelerate in 2013 in the context of revival of external demand.