Business expectations for consumer price growth have steadied (at the level of 10% for the next 12 months) against the backdrop of easing depreciation expectations, as evidenced by the results of the regular Business Outlook Survey conducted by the National Bank of Ukraine in Q3 2017.

Producers have further upgraded their expectations for higher output of goods and services (the balance of responses was 17.5% versus 14.2% in Q2 2017).

For the third consecutive quarter, managers of the companies surveyed continue improving their expectations for upturn in economic activity. The business outlook index went up to 117.4% compared with 114.3% in Q2. All respondents expected a pickup in business activity, except for the construction sector. The most optimistic expectations were expressed by manufacturing enterprises (127.1%), transport and communication (122.9%), as well as trade (120.2%).

In terms of regions, representatives of 21 Ukraine’s oblasts said they were expecting economic activity to revive. The highest expectations were reported by respondents from Lviv (with a business index of 144.3%) and Vinnytsia (131.1%) oblasts. Only respondents from Ivano-Frankivsk oblast expected a decline in economic activity (with a business index of 96.2%).

Respondents' improved expectations are premised on higher assessments regarding investment expenditures, labor force, high expectations of total sales growth, and positive perception of the financial and economic standing of their enterprises.

The stable FX market in Q3 2017 contributed to easing of depreciation expectations of businesses. For the second quarter in a row, the expected average exchange rate of the hryvnia was strengthening - to UAH 28.46 per USD 1, compared with UAH 28.68 per USD 1 in Q2. At this, the percentage of respondents that said the UAH/USD exchange rate would not exceed UAH 27.00 per USD 1 in the next 12 months grew to 21.1% (from 14.8% in Q2). 

Amid subsiding depreciation pressure, inflation expectations of businesses remained virtually at the previous quarter’s level, with consumer prices projected to grow by 10% in the next 12 months, compared with 9.9% in Q2. The percentage of respondents who projected consumer prices to rise by not more than 9.0%, or even to decrease, was 40.1%.

Production costs remained the main consumer price driver, according to business representatives. The balance of responses rose to 73.1% compared with 70.5% in Q2 2017.

Respondents of the main economic activities said they expected an increase in the output of goods and services to accelerate in the next 12 months (to 17.5%). The respondents from energy and water supply enterprises, as well as trade gave the most upbeat expectations (the balance of responses was 37.5% and 26.9%, respectively).

At this, respondents reported an increase in production capacity base, with the balance of responses rising to 4.3% against 1.1% in Q2 2017. As before, respondents from energy and water supply enterprises reported most spare capacities (the balance of response was 53.1%), while respondents from agricultural enterprises continued to report the largest shortage of capacity (-20.8%).

As before, respondents referred to prohibitively high prices for energy, commodities and supplies as main constraints on production growth, with the balance of responses being at 44.9% and 43.4%, compared with 46.2% and 39.9% in Q2 2017.

For the fifth quarter in a row, business leaders have remained optimistic about the financial and economic standing of their enterprises, with the balance of responses having increased to 7.2%, up from 6.1% in the previous quarter. The most optimistic assessments were received from agricultural, trade and manufacturing enterprises. While the most pessimistic were representatives of the mining sector, energy and water supply enterprises.

At the same time, respondents had better outlook regarding financial and economic standing of their enterprises in the following 12 months: the balance of expectations increased to 17.8%. Higher expectations of an improved financial and economic standing were reported by respondents from mining, manufacturing, transport and communication enterprises, and from other economic activities. Respondents from manufacturing enterprises had the highest expectations (with a balance of responses being at 28.4%), while those from energy and water supply enterprises had the lowest expectations (-9.7%).

Respondents were strongly expecting total sales growth for sixth quarter running (with a balance of expectations of 24.9% versus 25.2% in Q1 2017. All respondents, except those from construction enterprises, expected total sales to increase. The highest assessments were given by manufacturing and trade enterprises, with balances of expectations of 39.1% and 34.5% respectively.

Respondents upgraded their expectations of higher investment in machinery, equipment and instruments in the next 12 months: the balance of responses was 24.7% compared with 18.7% in Q2 2917. Respondents from all economic activities, except construction, were unanimous in assessing positively their expectations. The most optimistic among them were transport and communication sectors.

For the second consecutive quarter, enterprises have given firm expectations of higher volumes of foreign investment to be attracted: the balance of responses was 18.1% versus 10.3% in Q2 2017.

Respondents continued reporting higher expectations of staff increases at their enterprises, with the balance of responses inching up to 5.0% from 2.3% in Q2 2017. Plans to expand staff were informed by manufacturing, trade, transport and communication sectors.

At this, respondents slightly downgraded their expectations of rising borrowing needs in the short-term: the balance of responses was 37.8%, down from 38.5% in Q2 2017. Construction sector was said to have the highest borrowing needs, and the agricultural sector’s assessments of their borrowing needs proved to be the lowest (the balance of responses was 37.8% and 23.3% respectively).

The percentage of respondents who intended to take out loans, at 38.5%, was practically unchanged compared to the previous quarter (compared with38.2% in Q2). The share of respondents intending to take out hryvnia loans decreased to 81.5%. Traditionally, agriculture, trade, energy and water supply enterprises are most likely to take out hryvnia loans.

For reference

The Business Outlook Survey was conducted from 4 August through 4 September 2017. A total of 670 enterprises from 22 regions took part in the survey (excluding the temporarily occupied territory of Crimea, as well as Donetsk and Luhansk oblasts). The respondents have been chosen to represent a range of the main economic activities, forms of ownership, and sizes based on staff numbers. The survey only reflects the opinions of the respondents (heads/managers of Ukrainian enterprises) who have been polled, and does not represent NBU forecasts or assessments.