Ukraine: Ukraine's recovery gains traction in Q2, government receives cash injection
September 21, 2016
Ukraine’s recovery gained steam in the second quarter, as the country heals from a deep recession. GDP growth rose from Q1’s meagre 0.1% to 1.4% over the same period last year in Q2. The result marked the largest expansion since Q4 2013 and was a notch up from the 1.3% growth reported in the preliminary estimate. The acceleration was driven by an improved performance from the domestic economy, led by rebounding household consumption and booming fixed investment. In addition, positive base effects boosted the result, given that the economy had contracted by 14.7% in Q2 2015. Fewer military clashes and more stable price pressures have led to a stabilization in economic data and the economy appears to be steadily on a modest recovery path.
The domestic economy improved in Q2, underpinned by a rebound in private consumption. Household spending grew at the fastest pace since Q4 2013, coming in at 4.3% (Q1: -2.2% year-on-year). Receding price pressures have supported household consumption and inflation fell to the lowest point since Q1 2014 in the second quarter. In addition, the stabilizing economy is helping to shore up confidence levels in the country. Fixed investment surged 17.6% in Q2, the highest rate seen since Q2 2012 (Q1: +4.2% yoy). However, government consumption swung from a 0.1% increase in Q1 to a 2.4% contraction in Q2. Infighting has brought government activities to a standstill from February to April.
The external sector’s contribution to growth deteriorated in Q2 as exports plunged, contracting 6.5%, which was a more pronounced drop than the 3.8% fall recorded in Q1. While the lower value of the UAH combined with efforts to tap European markets have supported exports, shipments to Russia have plummeted since the onset of the crisis. In addition, a Russian ban on transitioning Ukrainian goods that was imposed in January has hurt exports to other economies, such as Kazakhstan. Imports contracted a marginal 0.1% in Q2, which was a much smaller drop than Q1’s 7.2% plunge and the smallest fall since Q3 2013. As a result, the external sector’s contribution to growth swung from plus 2.2 percentage points in Q1 to minus 2.3 percentage points in Q2.
On top of the improvement in economic data, Ukraine received another piece of good news in September. After a year of delay, the International Monetary Fund (IMF) completed the second review of the economic program and approved the disbursement of USD 1 billion to Ukraine on 14 September. The decision marks the first fresh funds for the country since August 2015 as political infighting and slow reform implementation have interfered with the bailout.
On the political front, a one-week ceasefire was announced between Ukrainian government forces and pro-Russian rebels on 14 September. The ceasefire is an attempt to halt the recent flare-up of violence in the eastern regions of Ukraine. Despite a peace deal reached last year, little progress towards a lasting resolution to the conflict has been made.