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NBU Comment on Real GDP Change in Q3 2021

NBU Comment on Real GDP Change in Q3 2021

In Q3 2021, Ukraine’s real GDP increased by 2.7% yoy, and by 1.5% in seasonally adjusted terms compared to Q2 2021. This is according to data published by the State Statistics Service of Ukraine.

As expected, the economic recovery from the 2020 crisis continued in Q3. At the same time, the actual year-on-year increase in real GDP came out lower than the NBU’s estimate published in its October 2021 Inflation Report (4% yoy). The deviation from the forecast was primarily due to the slower harvesting of late grains and industrial crops, as well as the weakening of global demand for metals-and-mining products and high world prices for energy.

Economic growth in Q3 was driven by sustained consumer demand

Final consumption expenditures of households rose by 9% yoy, underpinned, among other things, by:

  • growth in wages thanks to solid demand for labor, the increase in the minimum wage, the revision of wages for healthcare and education workers, and wage supplements for healthcare workers
  • increases in pensions, including due to recalculation of benefits for working pensioners
  • increases in remittances from abroad, driven by the rapid economic recovery in countries that host Ukrainian labor migrants.

On the other hand, consumption of the general government sector declined (by 1% yoy) due to the restrained and uneven financing of budget expenditures in a number of areas. In particular, the gross value added of public administration and defense decreased. Healthcare growth also decelerated as the spread of COVID-19 eased and the increase in spending slowed. Education also reported a decrease in gross value added. At the same time, construction performance improved, fueled by an increase in capital expenditures from the budget in Q3. 

The revival of investment supported the economic recovery

Gross fixed capital formation in Q3 rose by 14.5% yoy due to the improved financial performance of companies and higher capital expenditures from the budget.

Real GDP growth was restrained by the negative contribution of net exports

Against the backdrop of sustained domestic demand, imports continued to grow (by 12.3% yoy), including consumer and investment ones.  In contrast, the decline in exports deepened (to 8.6% yoy) due to expensive energy, the slower pace of harvesting, weaker external demand for certain metals-and-mining products, as well as reduced natural gas transit. As a result, the negative contribution of net exports to the change in real GDP remained significant (7.7 pp).

Most sectors in Q3 2021 improved their performance more slowly than expected

Agricultural performance was weaker than expected due to slower harvesting. A narrowing of external demand for metals-and-mining products restrained the recovery in industry, as did high natural gas prices. The gross value added of trade declined.

Market services sectors also recovered more slowly than anticipated. Specifically, the gross value added of hotels and restaurants, arts, sports and recreation, as well as transport, grew at a slower pace. This may have been due to the reversal of tourist preferences towards foreign travel, and an increase in production costs of businesses. The reduction in natural gas transit also had a negative impact on the transport sector.

Economic recovery will continue in Q4 2021, despite the rising prevalence of COVID-19 and quarantine restrictions

Further growth in real GDP will be primarily driven by the acceleration in the harvesting of late grains and industrial crops, as well as higher yields.  This will support both agriculture and related sectors, such as food production, freight transport, and wholesale trade.

In addition, despite the accelerated spread of COVID-19 and the tightening of quarantine measures, consumer demand remains stable, as evidenced by the virtually unchanged pace of growth in retail sales during September–November. Investment will be driven by the solid financial performance of businesses.

However, high energy prices, increased production costs of businesses, and decreased natural gas transit through Ukraine will further restrain economic growth.

These and other factors will be taken into account in the NBU’s updated macroeconomic forecast, which will be presented at the 20 January 2022 press briefing on monetary policy and published in the Inflation Report on 27 January 2022.

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