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NBU Comments on Real GDP Change in Q1 2020

NBU Comments on Real GDP Change in Q1 2020

In Q1 2020, real GDP shrank by 1.3% yoy. The main reasons for the decline in the Ukrainian economy in Q1 were the negative impact of quarantine restrictions on the service sector, a slump in investment, a deepening decline in public sector consumption due to the difficult fiscal situation, and weaker growth in private consumption and exports amid weakening external demand. This is seen in the detailed GDP indicators for Q1 2020 published by the State Statistics Service of Ukraine.

The actual economic downturn was greater than forecast by the NBU in its April Inflation Report (0.5%). This was due to the slower than expected growth in consumer and investment demand during that period.

  • Falling investment was an important contributor to the GDP decline. Gross fixed capital formation decreased by 21.4% yoy. The last time such a pronounced drop in investment was seen during the 2014–2015 crisis.

Before the coronavirus crisis hit, Ukrainian companies had positive business expectations. Most companies expected an improvement in their financial standings and a rise in investment spending on construction, and machinery and equipment. However, these expectations were not fulfilled, due, among other things, to the coronavirus crisis.

In Q1 2020, large- and medium-sized companies reported net losses (of UAH 4.9 billion) for the first time since 2016. The percentage of unprofitable companies moved up to 41%, from 27% in Q1 2019.

The poorer financial performance of companies was one of the main contributors to the fall in investment – after all, 65% of all capital investment is financed from companies’ own funds. Other reasons included the introduction of quarantine restrictions and uncertainty as to whether or not laws that launch the land and green energy markets would be passed.

  • Despite the coronavirus crisis, households’ consumer spending continued to rise, albeit at a slower pace – the growth slowed to 8.1% in Q1 compared to the same period last year. This resulted from weaker growth in household income, falling consumer sentiment, and a change in consumer behavior on the back of the quarantine restrictions. In particular, people spent less money on nonessential goods. Another reason for decreased consumption lies in the ban on the operation of non-food shops and markets, which was only partially offset by an increase in internet trading.

Government consumption fell further, by 9.7%, due to the difficult situation with budget revenues.

  • The volumes of exports of goods and services rose at a slower rate, by 0.9% yoy, driven primarily by narrowing global demand and falling commodity prices. More specifically, the growth in agricultural exports (mainly grain exports) decelerated. The volume of metallurgical exports (in particular ferrous metal exports) declined. Imports of goods and services shrank by 4% yoy, among other things, on the back of a drop in energy and car imports. The main reasons for this include weaker consumer demand and a slump in investment. The rise in exports and the drop in imports resulted in a significant positive contribution to real GDP change (2.7 pp), which was, however, offset by a drop in stocks.

In terms of economic activities, in Q1 2020, the performance of practically all sectors of the economy worsened. The only exception was the agricultural sector, largely due to the waning of a statistical effect that resulted from a shift in the timing of the harvest of the previous quarter’s crops. An important reason for this is the introduction of quarantine restrictions in Ukraine and globally. The sectors hit the most were the transport sector and most of the service sector. GVA in accommodation and catering dropped by 8.8%, while that in other services and transport fell by 13% yoy and 8.6% respectively. Another factor that negatively impacted the performance of transport was a decline in gas transit.

The difficult situation in the budget sector decreased GVA in those sectors that are mainly financed from the budget – education, healthcare, state administration and defense. GVA in the industrial sector slumped due, among other things, to warm weather, which affected the performance of the power industry and construction. GVA in the financial and insurance sector dropped on the back of the banks’ shrinking income and rising expenses. Conversely, GVA in the trade and information and telecommunications sectors grew, buoyed by households’ stronger demand for internet services, including due to households’ shift to working from home.

Real GDP is expected to fall even deeper. The fall will mainly result from the quarantine restrictions that were in effect throughout Q2.

The gradual easing of the quarantine, which began in mid-May, is being accompanies by the revival of economic activity and employment, as expected. However, available data suggest that the decline for the whole of 2020 is likely to be deeper than expected in the forecast the NBU published in its April 2020 Inflation Report.

An updated macroeconomic forecast will be announced during the regular press briefing on monetary policy on 23 July 2020. It will be published in the next Inflation Report on 30 July 2020.

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