Ukraine: Economy shows signs of stabilizing in the third quarter
December 23, 2015
After hitting rock bottom in Q1, recently-released data for the third quarter confirm that Ukraine’s economy has turned a corner. According to official data released by State Statistics Service Ukraine, the economy improved for the second consecutive quarter and fell 7.2%, which was a more modest decline than the 14.6% contraction registered in Q2. However, the result was worse than the preliminary estimate of a 7.0% drop. While the result still marks a notable contraction—and the economy remains far from healthy—the improvement suggests that the country’s downward spiral has bottomed out.
Q3’s upturn came on the back of an improvement in domestic demand, although dynamics are still weak. The ceasefire agreement’s relative success in containing military clashes has contributed to an improvement in economic data compared to the same quarter of the previous year. Fixed investment improved and fell 7.4% in Q3, which marked the best result since Q1 2013 (Q2: -13.8% year-on-year). Meanwhile, the contractions in private consumption and government consumption also moderated to 17.8% and 2.5%, respectively (Q2: -27.6% yoy; -6.7% yoy). However, austerity measures and weakened purchasing power continue to squeeze households and are contributing to the profound contractions.
Regarding the external sector, exports improved in the third quartering, falling only 11.3%, which marked the best result in over one year (Q2: -22.5% yoy). While exports to Russia, one of the country’s main trading partners, have plummeted since the onset of the crisis, the lower UAH and a shift in trade partners has supported exports. Imports fell 18.5% in Q3, which followed Q2’s steeper 32.2% fall. The UAH’s plunge has caused import demand to drop, although the low-commodity-price environment—particularly oil and gas prices—has reduced the cost of key imports. Overall, the external sector’s net contribution to overall growth fell from plus 6.7 points in Q2 to plus 3.6 points in Q3.
The improvement in the country’s GDP growth is encouraging news for Ukraine’s economy, however, the country’s prospects are grim. While the IMF’s reform plan should help correct the economy’s imbalances going forward, it will likely continue to weigh on private consumption in the near-term. Moreover, a lasting resolution to the conflict in the east still remains elusive and tensions with Russia have risen in recent weeks.