In Q1 2021, real GDP decreased by 2.2% in annual terms and declined compared to Q4 2020 by 1.2% in seasonally adjusted terms, according to data from the State Statistics Service of Ukraine.
Economic recovery slowed at the beginning of the year, as expected. This was due to quarantine restrictions in January and March, more adverse weather conditions, and increased competition in some global markets.
The actual GDP decline proved slightly deeper than the NBU estimated in the April 2021 Inflation Report. This was primarily due to the worsening of a number of indicators in the real economy in March and the slower recovery of the services sector amid quarantine measures.
Major support for the economy in Q1 came from household consumption
Household final expenditures increased by 4.4% yoy. The recovery in consumer demand was driven, among other things, by:
- high wage growth due to the resumption of economic activity after a strict lockdown last year, the partial adaptation of businesses and the public to the new conditions, higher minimum wages, wage increases for educators, and wage supplements for healthcare professionals
- an increase in pensions due to their modernization in March 2021 and a higher subsistence wage.
At the same time, quarantine measures resulted in private consumption growing more slowly than in Q4 2020 (5.3% yoy).
The growth in final consumption expenditures of the general government also decelerated (to 3.2% yoy, down from 4.1% yoy in Q4 2020), reflecting the tighter fiscal policy at the start of the year.
Investment activity was reviving slowly, still holding back the economic rebound
Despite the revival of investment activity at some companies, gross fixed capital formation continued to decline in Q1, although this decrease slowed significantly (to 7.8% yoy) compared to Q4 2020 (26.5% yoy).
GDP decline was primarily the result of the larger negative contribution of net exports
Robust consumer demand and reviving investment activity fueled imports, which rose by 3.7% yoy in Q1 2021 (after dropping by 4% yoy in Q4 2020). In contrast, the fall in exports deepened (to 17.4% yoy from 9.2% yoy in the previous quarter) due to last year’s poorer harvests, a lull in livestock farming, and tighter competition in some global markets, in particular for metals-and-mining products.
As a result, the negative contribution of net exports to the annual change in real GDP increased to 9.5 pp (up from 1.6 pp a quarter earlier).
Most sectors reported a decrease in value added in Q1 2021
The drop in exports was a significant factor in the industrial slump, while the poor performance of livestock farming caused a decline in agriculture. A decrease in government spending on road infrastructure, compared to last year, was one of the reasons of a setback in construction. All of this affected performance in wholesale trade and transport.
Gross value added in public administration and defense also returned to decline due to more restrained budget expenditures in the relevant areas. Performance in a number of service sectors, including hotel and catering services, and administrative and support service activities (rent, hire, travel etc.) improved somewhat, but value added of these sectors continued to decrease, in part due to the tightening of quarantine restrictions.
At the same time, public spending on healthcare amid an intensified spread of Covid-19 at the start of the year affected the growth in gross value added in healthcare. The stable operation of the banking sector and sustained demand for IT and financial services led to high growth rates in the relevant sectors. Real estate transactions also showed better dynamics.
Starting in Q2 2021, the economy will return to sustainable recovery
This will be driven by last year’s low comparison base and the rapid recovery of the global economy through accelerated vaccination and massive stimulus programs. In addition, high-frequency indicators suggest that domestic demand will continue to strengthen.
Specifically, seasonally adjusted indicators improved in April in most sectors of Ukraine’s economy, including retail trade, construction, and industry. Business outlook and consumer sentiment are improving. Preliminary data on foreign trade for April–May indicate an increase in exports and a high pace of growth in imports of consumer goods and certain investment goods.
These and other factors will be taken into account in the NBU’s updated macroeconomic forecast, which will be presented at the 22 July 2021 press briefing on monetary policy and published in the Inflation Report on 29 July 2021.