Ukraine: Economy's downward trajectory pauses in the second quarter as pace of contraction eases
September 18, 2015
Ukraine’s economy improved for the first time in a year-and-a-half in the second quarter, halting the economy’s downward growth trajectory. According to official data released by State Statistics Service Ukraine, GDP contracted 14.6% in Q2 over the same period of the previous year, which was a less pronounced decline than the first quarter’s notable 17.2% contraction and the preliminary estimate of a 14.7% fall. While the result still marks a profound contraction, the figure suggests that the country’s downward spiral that has been driven by the military conflict in the east has bottomed out.
Q2’s upturn came on the back of an improvement in Ukraine’s external sector. The external sector’s net contribution to overall economic growth swung significantly from the minus 0.6 percentage points recorded in the first quarter to plus 6.7 percentage points in the second quarter. The main contributing factor to the external sector’s better performance was a more marked fall in imports. Imports contracted 32.2% in the second quarter, which followed the first quarter’s 20.1% fall and marked a multi-year low. Households have been squeezed by skyrocketing inflation, austerity measures and the UAH’s devaluation which has caused import demand to plummet in recent quarters. In addition, low commodity prices—particularly for oil and gas—have reduced the cost of key import goods.
Adding to the external sector’s improved performance, the contraction in exports moderated to 22.5% in the second quarter (Q1: -26.2% year-on-year). While exports did perform better in the second quarter, the level is still depressed compared to what it was before the military conflict. The majority of fighting has taken place in the eastern regions of Luhansk and Donetsk, Ukraine’s industrial heartland, which has caused the country’s heavy industry to collapse. In addition, exports to Russia, one of Ukraine’s main trading partners, have plummeted since the onset of the crisis as tensions have escalated between the two countries. On the other hand, exports have been supported by the lower UAH and increased Euro demand, which helped limit the contraction.
Regarding domestic demand, growth dynamics remained weak in the second quarter. Private consumption deteriorated, worsening from a 20.7% contraction in the first quarter to a significant 27.6% fall as austerity measures and weakened purchasing power squeeze households. In addition, government consumption swung from a 5.0% expansion in the first quarter to a 6.7% contraction in the second quarter, which marked the worst result since Q3 2011. The country has had to cut government subsidies and spending as part of its USD 17.5 billion bailout agreement with the International Monetary Fund (IMF). However, fixed investment—a bright spot in the release—improved in the second quarter, falling 13.8% (Q1: -25.1% yoy).
The improvement in the country’s GDP growth is encouraging news for Ukraine’s economy, however, the country’s outlook remains grim. While the IMF’s reform plan should help correct the economy’s imbalances going forward, it should continue to weigh on private consumption in the near-term. Moreover, the economy is unlikely to rebound until a lasting solution to the military conflict is found, and progress in talks has stalled in recent months.