Downswing of the economy picked up speed to 5.1% in Q3 2014

Photo: Eugeny Musienko

As expected, the Ukrainian economy went into decline in the third quarter of 2014. After a 1.2% decline in the first quarter of the year and 4.6% in the second quarter, it fell by another 5.1% over the period July-September compared to the same period last year, the State Statistics Service informed.

“The acceleration of the decline was totally predictable as the escalation of the military conflict in the east of the country happened in August-September. However, an ever greater decline of 10% was anticipated,” said Head of the Analytical Department of SP Advisors Vitaliy Vavryshchuk. But worst is still to come. According to the consensus-forecast of Capital in October, the real GDP will fall by 8.1%, according to this year’s results, meaning that the greatest decline in the economy will be in the fourth quarter.

Recession deferral

Over the period October-December, the decline of the economy was much stronger than the annual average. The decrease of real GDP over those months will exceed 10% and will continue at such a pace in the first quarter of next year, experts surveyed by Capital agree. In other words, the decline of the economy that was predicted to be much deeper in the third quarter of the year is partially being laid over to the last months of this year.

The decline of the economy in July-September was less than that which economists had forecast, mainly owing to the indicators of the country’s agrarian sector. Last year, the reaping of the harvest was deferred to October-November, which bolstered the statistics of the fourth quarter. This year harvesting began a month earlier, which was factored into the statistics for the third quarter, Director of the Analytical Department of Concorde Capital Oleksandr Parashchiy explained, having expected an 8-9% drop in the third quarter.
In the first half of 2014 the volumes of agricultural output grew by no more than 7% per month over the corresponding month in 2013 and since July their growth rate picked up. Indeed, in September they shot up to 46.9% due to a low base and earlier harvesting of crops.

In addition to that Vavryshchuk believes that the unforeseen moderate decline can be explained by the fact that many enterprises continued their operations and increased their storehouse reserves of products.

Dismal outcome

Traditionally, the last quarter of the year helps improve the annual indicators thanks to the pre-holiday surge in consumption. But this time the Christmas and New Year holidays will not salvage the economy. First of all, the purchasing power of Ukrainians suffered due to the more than 60% devaluation of the national currency, which in turn provoked by the rise in consumer prices by 17.5% in September based on annual measurements. Taking into account that the consensus-forecast of Capital promises an increase in inflation to 19.5% by the end of this year, the purchasing power of consumers will continue to slide.

Secondly, residents of the Donetsk and Luhansk oblasts should not hope for a high level of shopping activeness. Meanwhile, last year these two regions accounted for 14% of consumers’ expenses on the purchase of goods and services in Ukraine, not including Crimea. As a result, the World Bank forecasts that the realistic volume of consumption of the people and the state sector on the whole will drop by 6.7% according to the results of the year. For comparison, in the first quarter of 2014 the volumes of consumption increased by 3.9%. In the second quarter, they fell by 0.2%.

The state is powerless

The state sector could support consumption, but this will only happen in the event of further escalation of the military conflict in the east. In this case, the decrease in consumption could be compensated by increasing state expenditures on defense, economist at the representative office of the World Bank in Ukraine Anastasiya Holovach presumes. However, production will simultaneously suffer from the aggravation of the conflict.

Besides that, the state budget is facing the problem of filling its coffers. The shortfall of revenues to the general fund of the state budget could reach UAH 12 bn in 2014, Minister of Finance Oleksandr Shlapak said on Tuesday. Accordingly,
an increase in expenditures for the defense sector after the funds in the Reserve Fund are exhausted would be at the expense of costs in other line items of the budget, which on the whole would not have a very positive effect on the economy.