In 2019, consumer price inflation will continue to slow, amounting to 6.3%. Inflation will enter the target range of 5% ± 1 ppearly next year and reach the 5% target in late 2020, the April 2019 Inflation Report says.
Tight monetary conditions and restrained fiscal policy are factors that will determine the pace of the further slowdown in price growth.
The slowdown in wage growth will be another contributor to the decline in inflation. In recent years, the wage gap between Ukraine and its neighbors has narrowed. This will reduce labor migration from Ukraine and ease the pressure on the domestic labor market.
In addition, price growth will decelerate on the back of cheaper natural gas in global markets and a larger supply of both domestic and imported food products.
The strengthening of the hryvnia in Q1 and early Q2 2019 is another factor that will help curb inflation. This will contribute to a further slowdown in the growth of prices for nonfood products.
Meanwhile, the increase in some tariffs to market levels, and higher excise taxes on alcoholic and tobacco products will put the brakes on the slowdown in inflation.
The NBU’s projection of GDP growth also remains unchanged As before, the NBU expects GDP growth to decline to 2.5% in 2019under the influence of relevant trends in the world economy, tight fiscal policy, and rather tight monetary conditions necessary to slow inflation to the target level. In 2020–2021, following a reduction in political uncertainty and an easing of monetary policy, economic growth will accelerate to 2.9% and 3.7%, respectively.
In 2019, the current account deficit will be the same as last year and will marginally increase in the years that follow, primarily due to the reduced transit of natural gas and a pickup in domestic investment demand. But this will be counterbalanced by financial account inflows.
The disbursement of financing from the IMF and other official lenders will improve Ukraine’s access to international capital markets and help maintain nonresident interest in hryvnia-denominated domestic government bonds. In addition, keeping real interest rates high will ensure the inflow of foreign capital into Ukraine, helping finance the significant external public debt repayments scheduled for 2019–2021. As a result, Ukraine’s international reserves will fluctuate between USD 21 billion and USD 22 billion in the next few years.
Apart from revised macroeconomic forecasts, the April 2019 Inflation Report also deals with the following specific topics:
- Ukrainian exports to the EU
In 2018, EU Member States continued to take up leading positions in Ukraine’s foreign trade, with trade turnover between Ukraine and these countries increasing 13.6% and accounting for 37.5% of Ukraine’s total trade turnover.
Ukraine’s exports to EU Member States increased in more than just quantitative terms. As in previous years, the largest increase in 2018 was seen in exports of processed goods, which accounted for 31.5% – the largest share – of all exports.
- how weather conditions influenced the core sectors of Ukraine’s economy
Weather impacts production rates in some sectors of the economy in the short run.
In March 2018, for instance, the unusually snowy and chilly weather was one of the reasons that real GDP grew at a relatively weak pace in Q1 2018. The cold weather primarily affected construction that month by limiting its volumes – an adverse effect that was only partially offset by the positive impact on the energy sector. Meanwhile, the harvesting campaign in 2018 got off to an early start, kicking off in June and making a significant contribution to the acceleration in GDP growth in Q2 of that year.
As with 2018, weather conditions in early 2019 had a material impact on the performance of some sectors.
Overall, however, weather effects die down in the short run. They are only marginally reflected in quarterly and annual indicators, except crop yields. This is driven both by opposite effects on different types of economic activity and by how the effects distribute themselves across months.
- Business Outlook Survey: businesses starved for employees in 2018 as the economy grew
The number of employees declined in 2018, an NBU survey of businesses showed. Polled businesses said they had difficulty finding suitable candidates for existing vacancies.
Among reasons for the decrease in the number of employees, respondents cited labor migration as an important factor in hampering the development of companies in 2018. Labor migration was primarily cited by businesses in agriculture, construction, and transportation.
Over a quarter of respondents reported an increase in the number of employees, both as a result of job creation driven by expansion of business and as a consequence of filling existing job openings. These trends reflected a further pickup in business activity and more rapid economic growth.
- how financial markets responded to changes in the Fed’s and ECB’s Communications
Monetary policy decisions impact financial markets in a profound way by forming market participants’ expectations about the likely trajectory that interest rates are going to follow. Simultaneously, communications accompanying monetary policy decisions are at least as important a channel for transmitting information to financial markets.
Recent decisions by the ECB and the Fed exemplify the sensitivity of financial markets to communication accents and central bank projections. Although both the ECB and the Fed made policy decisions in March 2019 that tended to ease monetary policy, financial markets responded with opposite dynamics – precisely because of differences in how the regulators communicated their decisions. The ECB emphasized the weakness of the EU economy, while the Fed described the US economy as being in good condition and limited its rhetoric to voicing its reservations about risks to global economic growth.
- New Currency Regulation System and Currency Liberalization
Introduced at the beginning of February 2019, the new liberal currency regulation has not had a significant impact on the FX market. Despite the introduction of a raft of measures intended to ease currency regulation, demand for foreign currency from both business and the public has been moderate. The hryvnia’s overall volatility was close to last year’s levels, staying within a range considered acceptable for emerging markets.
- Estimating the Accuracy of Macroeconomic Forecasts
The NBU has introduced the practice of making annual assessments of its macroeconomic projections. A comparison between the accuracy of the NBU’s forecasts (of inflation, GDP, and the current account balance) and the accuracy of projections by the region’s other central banks (Czech Republic, Serbia, Poland, and Hungary) shows that these forecasts are, on average, mutually consistent.
The Inflation Report reflects the NBU’s perspective on the current and future economic state of Ukraine, with a focus on inflationary developments, which inform the NBU’s monetary policy decisions. The NBU has been publishing the Inflation Report on a quarterly basis since April 2015.