You're reading: Business Sense: Nation crawling out of recession, at least for now

Despite a double-digit drop in the official gross domestic product that has haunted Ukraine throughout the year and into the third quarter, the country’s economic outlook is not as grim as the gloom one hears all around.

Throughout this year’s economic shakeup, Ukraine’s economy has undergone some painful but necessary adjustments, which could pay off in the long term – and more so if reforms key for fueling sustained growth are adopted. But if things don’t go right due to political instability, the country could sink back into recession.

Ukraine’s State Statistics Committee on Nov. 16 made public its assessment of real gross domestic product growth in the third quarter of 2009, showing that the economy contracted by 15.9 percent compared to the same period of 2008. Indeed, this sizable contraction lengthens the chain of humiliating declines recorded since late last year. During the previous three quarters, starting with the last quarter of 2008, Ukraine’s economy plunged by 8.0 percent, 20.3 percent and most recently by 17.8 percent, respectively, compared to the same quarter a year earlier.

Indeed, such dimensions of GDP contraction spell nothing but a deep and lengthy crisis. By a number of accounts, Ukraine’s economy has been in trouble. The unemployment rate jumped to 9 percent, real wages are down as well as the purchasing power of consumers. A 60 percent plunge of Ukraine’s currency – the hryvnia – made banking unworkable.

To reverse these trends for the better will take a time span of a couple of years. However, the entire picture of the economy is not so grim, and is not so unique taking into account a global perspective.

Other economies, especially those with similar openness to trade and reliance on commodities hit hard during this recession, have also recorded sizable contractions this year. But there are exceptions. Some economies have been declared recession-free already this year.

As a general rule of thumb, economists say that an economy is in recession when it posts two consecutive quarters of economic decline, which is measured over a previous quarter and in seasonal adjusted terms. And so, Germany’s economy, which contracted by 7.1 percent in the second quarter this year, was declared free of recession thanks to the fact that compared to first quarter it grew by 0.3 percent. Other economies that technically escaped being dubbed in recession for similar reasons include France and South Korea.

Unfortunately, domestic statisticians lack the practice of publishing the statistical figures of a seasonally adjusted change of real GDP on a previous quarter. According to our calculations, made using available raw data, Ukraine’s economy went into deep recession due to sharp declines registered during the last quarter of 2008 and the first quarter of 2009. Contraction was about 12 percent in each of these quarters.

But then, a 4.8 percent increase of GDP in the second quarter followed, indicating that the economy was pulling out of recession already in the first half of this year. The third quarter saw, as it appears from the official GDP year-on-year statistics, a slightly softer growth over the previous quarter. This effectively means that Ukraine’s economy has been further inching away from the edge of the recessionary abyss.

There are underlying factors that have been paving the way for a recovery.

For one, Ukraine’s economy has undergone some major and important adjustments this year. Consumption has slowed to more reasonable levels, and a ballooning trade deficit has narrowed to near zero levels. These and other factors have relieved pressure on the currency and helped keep inflation relatively in check.

On the fiscal side, the authorities supported consumer spending enough, keeping many afloat despite the deep declines by allowing a steep rise in the budget deficit. And Ukraine’s top exports, namely steel, have gained in competitiveness due to its currency devaluation.

Looking forward, Ukraine’s economy is likely to register a full-year decline of at least 13 percent in 2009. This is a dramatic drop in its own right, but it’s still a big question of whether Ukraine’s economy will slowly continue recovering away from a deep recession of early 2009, or slip back into another recession in 2010.

The banking sector is still in trouble, and is likely to remain shaky for a lengthy while. High capital requirements for banks globally would make it harder to raise capital for local banks and their clients.

If there are no improvements on the unemployment and wage contraction sides, weak consumer demand is likely, and this could spark fresh GDP contractionary pressures.

The main hope for an immediate rebound in GDP lies in external markets, namely demand for Ukraine’s top exports, foremost steel. However, equally important and crucial for long term and sustained economic growth is the country’s ability to adopt reforms and demonstrate prudent policymaking, which is essential to boost investor confidence and attract fresh foreign direct investment inflows.

This cocktail remedy is direly needed to make a genuine and long term recovery.

As for now, the much-hyped fears about further pressure on the hryvnia – and further devaluation – and the chaos that was rumored to follow such a doomsday scenario – looks overblown.

And with Ukraine’s economy generally weak, don’t expect any real estate bubbles to build up again soon. But, there could be a smaller-scale bubble on the verge of caving in, namely Ukraine’s stock market, which has been quite bullish in recent months.

Alexander Valchyshen is head of research at Investment Capital Ukraine in Kyiv and a member of the executive committee of the Ukrainian Society of Financial Analysts. He can be reached at [email protected].