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NBU Comment on Real GDP Change in Q2 2021

NBU Comment on Real GDP Change in Q2 2021

In Q2 2021, Ukraine’s real GDP increased by 5.7% in annual terms, but it declined by 0.7% in seasonally adjusted terms compared to Q1 2021. This is according to data compiled by the State Statistics Service of Ukraine.

The year-on-year recovery was expected. It was driven by sustained consumer demand, the growth in investment activity, and last year’s low base of comparison. 

At the same time, the actual increase in real GDP in Q2 2021 (5.7% yoy) came out lower than the NBU’s estimate published in its July 2021 Inflation Report (7.5% yoy). This is primarily due to later start of the harvesting campaign, adverse weather conditions, volatile financing of budget expenditures, and oil supply disruptions. However, most of these factors were temporary. 

Annual economic growth in Q2 was primarily driven by household consumption

Final consumption expenditures of households rose by 17.4% yoy. Robust consumer demand was underpinned, among other things, by: 

  • high wage growth due to the revival of economic activity after the crisis, an increase in the minimum wage, a revision of wages in healthcare and education, and wage supplements for physicians 
  • the increase in pensions in March 2021, and a recalculation of pensions for working retirees.

The contribution of the low base of comparison was also significant: last year, it was in Q2 that the strictest quarantine restrictions were imposed, depressing household consumption significantly. 

Consumption in the general government sector continued to grow. Specifically, the focus was placed on health expenditures amid further efforts to combat the spread of COVID-19. Expenditures on education were also increased. At the same time, other expenditures (including defense and security) were relatively restrained, affecting the gross value added in the respective activities.  

Investment activity continued to recover and investments returned to growth in year-on-year terms

Gross fixed capital formation increased by 14.8% yoy in Q2, fueled by improved companies’ business outlook and financial performance, and by greater public capital expenditures, in particular on road infrastructure.

Real GDP growth was restrained by a larger negative contribution of net exports

Robust consumer demand and a revival of investment demand led to a sharp increase in imports, by 21.5% yoy in Q2. Imports of agricultural machinery and industrial equipment, cars, and trucks increased significantly, while imports of consumer goods remained high. 

Exports improved slightly, but continued to fall (by 6.2% yoy). On the one hand, this was in part due to the drawdown of stocks from last year’s lower harvest. On the other hand, the rapid rise in prices for certain goods (including edible oil and oilseeds) restrained the demand for them. As a result, the negative contribution of net exports to real GDP growth widened to 10.7 pp. 

The performance of most sectors in Q2 2021 returned to growth in annual terms

Gross value added increased in trade, transport, manufacturing, mining, a number of sectors mainly funded by the government (education and healthcare), and services. 

However, as harvesting kicked off late this year and livestock farming kept decreasing, the gross value added of agriculture continued to shrink. Cooler weather and a change in the breakdown of power generation by source resulted in a decrease in the gross value added in the energy sector.    

In Q3, the economy has been recovering rapidly

First, the recovery has been driven by an increase in the pace of harvesting, crop yields being higher than last year. Second, the sustained consumer demand, supported by high wage growth and better labor market conditions, remains the strong contributor. Other contributors have been the further recovery of investment activity, favorable external conditions created by the rebound of the global economy amid the vaccine rollout, large-scale stimulus, and growing optimism. This is according to available high-frequency data from retail, transport, agriculture, and some other sectors. 

These and other factors will be taken into account in the NBU’s updated macroeconomic forecast, which will be presented at the 21 October 2021 press briefing on monetary policy and published in the Inflation Report on 28 October 2021.

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