Ukraine’s economy: pardon impossible to be executed

On March 24, in the course of the March of Independence, President of Ukraine Petro Poroshenko said: “There are reasons to believe that economy has overcome the war-induced deep crisis. Business is adjusting to new conditions, finding new markets instead of the Russian market that has been closed for us. Russia does not stop the economic war against us, trying to exhaust us… Nevertheless, the economic growth may be restored within the coming months. ”

Naturally, the statements of the Ukrainian “guarantor” were met with skepticism. In fact, despite tradition, he was quite cautious in his judgments.   Let us have a look at the most fundamental indicators.

The industrial production in Ukraine shrank 21.1% in March, 21.7% in April, 20.7% in May, 18.1% in June, 13.4% in July. The production grew in June by 1.5% versus the previous months, and in July – by 3.4% versus June. Jan-Jul 2015 cost Ukraine 19.5% of the industrial produce. However, the dynamics looks more positive now. 

In other words, at first sight, Ukraine’s industry tested the bottom and started a recovery growth. 

Look at the metallurgy (as of 2012 - 22% of the industrial production) that traditionally accounts for the one fourth of Ukraine’s export revenues (25.46% for the first half of 2014, 23.14% for the first half of 2015).  In Jan-May 2015, metallurgical production in Ukraine shrank 25.8%. Physical export fell 26.3% to 8.4 million tons. In money terms, it fell by 40.7% to $3.5 billion (the global slump of the prices of metallurgical products is behind that difference).  Export accounted for 86% of total rolled metal products versus 84% for the five months of 2014. By July, the decline slackened to 23.3% according to official statistics. The optimistic result fades away in case of studying the statistics for every month.  In June, crude iron production fell by another 5%, steel production fell 8%.  ArcelorMitall Krivoy Rog, the largest integrated iron-and-steel company, was suspended for capital repair.  In July, crude iron production was left unchanged, steel production fell totaling 7% and 4%, respectively.

In fact, despite the stabilizing formal indicators, the physical metallurgy kept shrinking as of July. Even the seasonal factor fails to stop the decline. Perhaps, the key factor is the unfavorable external business trends. 

Exports of the iron ore increased by 17.9% in Jan-Jun as compared to the same period of 2014.  First, the export grew, as internal consumption fell – production increased by some 3%, while the share of export grew to 68%.  Second, proceeds from export fell 40%.  Iron ore prices slumped, and there are no factors able to change the situation. In June 2015, production fell 6.4% comparing to May.

Coal recovery for the first half of the year fell 52.3% as compared to the same period of the past year. The June indicators were even worse than the May ones - by 6%. Nevertheless, in July the indicators grew 4.3% versus the previous month.

These were the outsiders. What about the leaders of the industrial “recovery growth”?

Machine building fell 16.7% in the first half despite the 10.8% growth in June. In July, decline slackened to 11% (12.3% growth versus the previous month).

In fact, this result looks questionable – Ukraine suffered huge decline of transport vehicle production: 86.7% for the first half of 2014. Production of light motor vehicles fell 89.9%.

In other words, it is very likely that the military industrial sector made a crucial contribution to the growth of machine building. In Kharkov, for instance, the average indicators of Ukraine were exceeded manifold.

The chemical industry fell 19.4% by June 2014, but in June, the decline was reduced to 16.5%. Here, we probably deal with the low base effect. Anyway, chemical production has evidently stabilized, as the demand by the agribusiness industry grew.

Food industry (accounting for impressive 11.3% of industrial production) tested the bottom losing 13.4% in Jan-May. The decline reached 15.5% in June and slackened to 6.4% in July. However, one can see no leaps in the monthly indicators. In June, the food industry grew 0.9%, in July – 0.3% versus June.  The seasonal factor is not likely to stabilize the situation either. 

Light industry saw a solid growth in July (6.4%). However, its share in total industrial production is insignificant. 

In other words, the three pillars the growth leans on: agribusiness industry (food and chemical industry), stabilization of the domestic demand after return to the overvalued hryvnia rate, and State Defense Procurement and Acquisition. Metallurgy and mining industry keep falling.

Construction in June fell 28.3% versus June 2014, but grew 3.6% by May.  In July, restoration continued, obviously thanks to the mild seasonal factor

As to the agricultural industry, it fell 9.3% in Jan-Jun versus the same period of 2014, but grew 1.9% in Jul, perhaps, due to harvest rescheduling. Agricultural industry will inevitably fall by an estimated 14% (Agricultural Ministry) by the end of the year, as areas under crops decreased, the conditions worsened. Consumer price index of the FAO fell 21% in June versus 2014 - the lowest level since 2009. 

The real salary in Ukraine fell 26.3% in June 2015 versus the same period of 2014, but grew 5.8% by May. However, as shown below, this recovery growth of incomes is quite shaky like the retail trade and other indicators depending on it.

In other words, it would be wrong to say that the economic situation in Ukraine has stabilized. This year, agriculture will hardly correct the situation as efficiently as it was in the previous year.

The reduction of the agricultural production will inevitably affect the food industry. Chemical industry will soon bump into winter restrictions on gas consumption, while the industrial production in general will face another, maybe even stronger wave of energy crisis.

In autumn, Ukraine will face another price hike, and eventually, reduction of real incomes and solvent consumer demand. The remaining demand will be satisfied mainly with a new wave of import after Ukraine lifts customs barriers under the Association Agreement with EU. As to the enterprises working for the domestic market, one should have no illusions upon the point.

Наконец, металлургия и добыча ЖРС продолжат падать «под тяжестью» неблагоприятной ценовой конъюнктуры, которая сохранится надолго. Надстройка в виде торговли, банковского сектора и потребления, очевидно, последует за производством.

Actually, another wave of economic decline is inevitable. However, it is hard to say so far how tangible it will be and how much it will affect the ruling regime.

EADaily Economic Analysis