The FINANCIAL -- In 2011, the Ukrainian economy grew by about 5% yoy, according to early
estimates, from U.S.-Ukraine Business Council. Higher than initially expected growth was achieved thanks to
robust private consumption and a record high agricultural harvest.
Thus, private consumption rose by an impressive 15.7% yoy in 3Q, further up from about 13.4% yoy in 1H 2011. Private consumption was underpinned by an 8.5% yoy increase in real wages for January-November, revival of consumer credit[1] as well as a reduction in population savings.
Investments grew by about 40% yoy over the first nine months of 2011 amid high budget spending on large infrastructure projects and large inventory rebuild. This development was in line with an 11.1% yoy real increase in construction output and a 17.5% yoy growth in agriculture. Thanks to a record agricultural harvest (56.7 million tons of grain), Ukraine ’s grain stockpiles as of December 1st 2011 were more than 60% higher than in the respective period last year.
At the same time, the deterioration of the external environment hit Ukraine ’s exports and export-linked sectors in 3Q 2011. Thus, exports declined by 3.4% yoy in real terms in 3Q 2011 compared to about an 11% yoy increase in 1H 2011. Ukraine ’s export-driven metallurgy fell by almost 5% yoy in December 2011 due to softening overseas demand and downward correction of world steel prices.
For similar reasons, production of chemicals declined 1.1% yoy in the last month of the year. Production of machinery, equipment and transport vehicles grew at a moderate 4.5% yoy in December as a worsened 2012 growth outlook may have prompted a downward revision in companies’ investment plans.
On the upside, expensive imported natural gas stimulated domestic extraction of fossil fuels. As a result, the mining sector reported a 5.5% yoy growth in December. Overall, although total industrial production has been losing steam since July and reported negative growth in December (-0.5% yoy), the sector rose by 7.3% yoy for the year 2011 thanks to robust growth in the first half of the year.
In 2012, real GDP growth in Ukraine is projected to weaken to about 3% yoy. Private consumption will remain the principal driver of economic growth, supported by moderate inflation in the first half of the year and likely pre-election fiscal loosening. At the same time, continuing weaknesses on external markets will exact a toll on the export-dependent Ukrainian economy.
In addition, adverse weather conditions have hurt Ukraine ’s winter grains. Thanks to improved machinery, fertilizer use and management, Ukraine still is projected to produce an above-average harvest in 2012. However, as the harvest will be lower than in the previous year, we forecast a decline in the sector in 2012.
On the upside, however, we believe that Ukraine ’s co-hosting of the Euro 2012 football championship and projected improvement in the external environment in the second half of the year will provide support for the Ukrainian economy. In addition, imports may expand at a slower pace amid weaker investment demand and lower volume of natural gas imports.Failure to reach a compromise natural gas agreement with Russia and a more protracted period of weak global economic growth are the downside risk factors for the forecast.
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