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NBU Comment on Real GDP Change in Q2 2020

In Q2 2020, real GDP shrank by 11.4% yoy. Strict quarantine restrictions and weak demand led to a deeper slump in the economy. As a result, real GDP in Q2 decreased by 9.9% qoq in seasonally adjusted terms. This follows from detailed GDP data for Q2 2020 published by the State Statistics Service of Ukraine.

The actual downturn in the economy was in line with forecasts of the National Bank of Ukraine (NBU) published in the July 2020 Inflation Report

  • As expected, the main factor in deepening the drop in GDP was a weakening of domestic demand. Low demand was a direct consequence of tight quarantine restrictions on economic activity and an indirect result of uncertainty over the future spread of the pandemic.  Thus, households were less likely to buy nonstaple goods and services, while businesses were inclined to postpone investment projects. As a result, consumer spending by households fell for the first time since 2015 (by 10.4% yoy). Public sector consumption remained lower than last year. However, this decline decelerated (to 1.7% yoy) in response to expanded fiscal measures intended to support the economy and prevent the spread of infection.
  • Falling investment was an important contributor to the decline in GDP. Gross fixed capital formation decreased by 22.3% yoy. The reduction in investments continued due to a weakening of external and internal demand, uncertainty over the legal framework for individual sectors, including alternative energy, and further spread of disease. The financial perfromance of businesses remained worse than last year, including due to higher expenses to combat the pandemic. However, investment was partly supported by an increase in budget expenditures on road infrastructure.
  • Exports of goods and services declined (by 9.0% yoy), but at a lower pace than imports. The drop in exports resulted from a lower agricultural output, weak external demand, including for ferrous metals, and the reduction in natural gas transit set out in the agreement with Gazprom. At the same time, weak consumer and investment demand led to a drop in imports (by 23.4% yoy), causing a positive contribution of net exports to the change in GDP (8.3 pp).

In terms of economic activities, the performance of practically all sectors of the economy worsened in Q2 2020. A late start of the harvesting campaign and lower wheat yields were major contributors to the decline in GDP. The NBU estimates this impact at a negative 0.9 pp. Along with low indicators in animal breeding, this caused a plunge in added value in the agricultural sector. Considering that the stocks of some crops, including corn, were depleted, the slump in agriculture also drove a sustained negative contribution of inventories to the change in GDP. The significant fall in the agricultural sector was accompanied by a deepening downturn in the industrial sector, IT, as well as all services sectors. 

In Q3 2020, a gradual recovery of the economy is expected. The recovery will be driven not only by softer quarantine measures, but also by stronger external demand and higher domestic consumption. However, economic activity will be held back by individual restrictions as part of the adaptive quarantine regime, as well as increasing risks of an accelerating spread of the coronavirus.

The NBU will announce a revised macroeconomic forecast at its regular press briefing on monetary policy on 22 October 2020 and will publish it in the Inflation Report on 29 October 2020.

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