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NBU Update on Real GDP Change in Q3 2020

In Q3 2020, real GDP shrank by 3.5% yoy. At the same time, amid the recovery in consumer demand and business activity since the easing of quarantine restrictions, real GDP in Q3 grew by 8.5% compared to Q2 in seasonally adjusted terms. This follows from detailed GDP data for Q3 2020 compiled by the State Statistics Service of Ukraine.

Actual economic indicators came out better than projected by the NBU in its October 2020 Inflation Report. The deviation from the forecast was due to a faster-than-expected recovery in consumption.

  • The further contraction of investment remains a key factor behind the drop in GDP. The decrease in gross fixed capital formation deepened to 23.8% yoy and was observed in almost all sectors, despite the improvement in the financial performance of companies. Businesses held back from investing due to the increase in COVID-19 cases and uncertainty around the further spread of disease. Unresolved issues in alternative energy also had a negative impact. Significant growth in capital investment was seen only in postal and courier activities amid a robust growth in delivery services and online trade.
  • Meanwhile, consumer demand recovered. This was driven by the easing of quarantine restrictions, an increase in household incomes, and the recovery in budget expenditures. In general, household consumption expenditures increased by 1.0%. Public sector consumption also increased, by 8.2% yoy. In particular, budget expenditures on road infrastructure, healthcare, and defense increased significantly.
  • The contribution of net exports to the change in GDP, though positive, was noticeably lower (at 2.0 pp). On the one hand, exports of goods and services remained lower than last year (by 7.2% yoy). On the other hand, the fall in imports decelerated markedly (to 10.1% yoy), thanks to a revival in consumer demand.

By types of activity, all sectors of the economy improved their performance, although only some of them increased production compared to last year. Agriculture continued to be a significant contributor to the fall in GDP due to a poorer harvest this year. In contrast, the easing of quarantine restrictions and the recovery in consumer demand amid fewer opportunities for external tourism boosted trade and slowed the decline in the value added of the services sector. Specifically, better performance was demonstrated by hotels and restaurants, arts, sports, entertainment, and real estate transactions. The slump in the financial sector also decelerated. In addition, value added in the IT sector returned to growth. A faster increase in budget expenditures contributed to growth in public administration, defense, healthcare, and construction, and slowed the decline in education. Implementation of road infrastructure development projects contributed to improved performance of freight transport and wholesale trade.

In Q4 2020, the further spread of COVID-19 and the tightening of quarantine restrictions will hinder economic recovery. High-frequency indicators are showing a deterioration in consumer sentiments and business expectations, although external conditions remain largely favorable for Ukrainian enterprises. Agriculture will continue to be a significant contributor to the fall in GDP. Meantime, a further easing of fiscal policy and higher government spending on social support, healthcare, and road infrastructure may offset the impediments to economic recovery somewhat.

The NBU will announce a revised macroeconomic forecast at its regular press briefing on monetary policy on 21 January 2021 and will publish it in the Inflation Report on 28 January 2021.

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