Ukraine: GDP fell steeply in Q2, but activity may have risen since; Oct 2022

Real GDP fell by 37.2% year on year in April-June, according to the Ukrainian authorities, compared with a fall of 15.1% year on year in the first three months, linked to the multiple domestic and global impacts of the ongoing war with Russia. The steep fall in economic output, and so income, follows a relatively weak recovery last year from the downturn triggered by the Covid-19 pandemic in 2020.

More recent information points to an ongoing pick-up in business activity, which nevertheless remains well below pre-invasion levels. For example, the share of firms surveyed that were still shut in August, and so conducted no work at all, fell to 11%, from 21% in June, according to the latest macroeconomy overview from the National Bank of Ukraine (NBU, the central bank). Similarly, firms working at below 25% capacity dropped to 10% of those surveyed in August, from 22% in June, according to the Institute of Economic Research (IER). However, there was considerable variation in capacity usage between sectors, so that while it has climbed to relatively high levels in sectors focusing on consumer basics (such as the production of food and clothes) and light industry, it remained low in heavy industries, such as metals, as well as in construction.

Meanwhile, partial, unorthodox high-frequency data—used by the Ukrainian authorities in wartime as proxy indicators, in lieu of being unable to collect more standard data—show restaurant turnover strengthening in the third quarter, and purchases of train tickets continuing to rise from July, before plateauing in September-October. Lastly, in recent months, Ukraine’s output and export performance is likely to have received a boost, both for the onset of the early grain harvest—which nevertheless shows volumes far down on the same point of last year, owing both to reduced area harvested and lower yields—as well as the continuance of the “grain corridor”, which from late July opened some Ukrainian Black Sea export routes to global market. So far, around 5.5m tonnes of product has been shipped in this way, both freeing storage space for this season’s harvest and providing farmers with incomes for future production.

That said, forward-looking surveys of business sentiment, while remaining slightly positive overall, show a narrowing of gap between optimistic and pessimistic respondents, amid extremely tough economic conditions and considerable uncertainty over the future. Among the chief problems faced by businesses are rising input costs, labour shortages, severe logistics difficulties (low availability of freight carriages), and weak demand amid rising inflation, which climbed to 24.4% year on year in September from 23.8% the previous month. Moreover, following recent military reversals in Kharkiv and Kherson regions in September, Russia’s response had been to launch missile strikes on water and heating facilities. This seems likely to be central to Russia’s strategy going forward, damaging Ukraine’s production capacity still further—in the absence, that is, of a significantly greater quantity of air-defence systems for the main Ukrainian cities from the West.

While showing signs of resilience, therefore, Ukraine’s economy will remain heavily reliant on foreign financial aid--such as the US$500m promised at the end of September by the UK government to Ukraine to buy gas for the winter--for the foreseeable future.