Macroeconomic forecast: Consumer demand to recover by mid-2021, the economy would need more time

News 27 august 2020 - 16:00

This release contains macroeconomic forecast for 2020-2021 under the base case (most probable) scenario developed by the Research Department of Alfa-Bank Ukraine. 

Key points

  • The economy has switched to recovery mode, however it will take full 2021 to return back to 2019 level
  • Inflation to accelerate to 8% in 2021 on the back of increased demand, elevated tariffs, boosted minimum wage
  • Soft fiscal policy to expand public debt further

Detailed

Active phase of quarantine with a lockdown that caused partial halt in economic activities in Ukraine and many foreign markets resulted in real GDP dropping 11.4% y-o-y in the second quarter. Sector-wise, the biggest losses expectedly were for passenger transportation, hotels and restaurants, and a couple of other service sectors.

However, consumer demand already shows signs of vibrant recovery in mid-2020. In particular, retail sales surged 8.5% y-o-y in July, accompanied by recovery in reported wages throughout private sector and growing imports of consumer goods.

It is consumer demand that is expected to be the key driver for economic recovery during upcoming quarters. According to our estimates, consumer demand should recover to its pre-COVID level already by mid-2021. This will be facilitated by growing real disposable income, soft fiscal policy, and macro-financial stability.

We expect the economy to regain modest y-o-y growth rate already at the 2020-2021 turn, backed by recovery in consumer demand. After that, in the second quarter of 2021, low baseline would cause it to grow more than 10% y-o-y, mirroring the deep plunge a year before. Overall, Ukraine’s real GDP should grow 3.9% in 2021.

Ukraines GDP in 2017-2021, % real change  y-o-y

SourcesState Statistics Serviceforecast by Alfa-Bank Ukraine

However, eroded corporate profits, lack of foreign investment and general spirit of uncertainty would cause investment to lag behind consumption significantly. According to our estimates, the share of investment in GDP would drop to unprecedented 12.5% in 2020. In 2021, despite some recovery, it is expected to remain still under its previous low of 2015 (13.6%).

Recovering consumer demand, renewed growth in input resource prices, hikes in administratively regulated tariffs and accelerated expansion of the minimum wage would cause a significant pick-up in inflation already over the next 6 months.

We expect the growth in Consumer Price Index (CPI) to thrust through the target range of the National Bank of Ukraine already in spring 2021. By the end of 2021, this inflation measure is expected to reach 8%. The National Bank of Ukraine is likely to respond to this trend with hiking its prime rate already in early 2021.

Consumer Price Index (CPIin 2017-2020, % annual change

SourcesState Statistics Serviceforecast by Alfa-Bank Ukraine

In the height of COVID-induced lockdown, Ukraine’s trade balance was abnormal because of sharp cuts in imports of goods and services. In the second quarter of 2020, Ukraine enjoyed a surplus of over USD 1 bln (first case of surplus since 2010). However, domestic demand recovery brings the former state-of-play back. We expect Ukraine to post a USD 12 bln trade deficit in 2021, which would be almost the same it had in 2019. Return to a usual trade deficit amid low foreign investment inflows, accelerating inflation and soft fiscal policy should add some pressure on the FX market. We expect the average annual exchange rate to adjust from USD/UAH 26.9 in 2020 to USD/UAH 28.6 in 2021.

By the time this forecast is compiled, draft law on the State Budget for 2021 has not been presented yet. However, there have been many signals that the government intends to maintain a fairly high fiscal deficit next year. We anticipate that the actual Consolidated Budget deficit in 2021 would amount to 5% of GDP. As usually, most of this deficit would be covered by borrowing, elevating the public debt to more than 64% of GDP at the end of 2021 (to compare with 50.3% of GDP at the end of 2019).

In the context of medium-term development prospects, we have to admit many issues limiting Ukraine’s growth potential. These include tumid share of consumption in the economy, shadow economy imbalances, demographic challenges, and high perception of country risk.

Key macroeconomic indicators


2018

2019

2020f

2021f

GDP, UAH bln

3,561

3,975

4,004

4,472

GDP, USD bln

130.7

154.9

148.9

156.4

GDP, % real change

3.4

3.2

-3.5

3.9

CPI, % average annual change

10.9

7.9

2.7

7.1

CPI, % change Dec-to-Dec

9.8

4.1

4.6

8.0

Average wage, UAH ‘000

8.9

10.5

11.5

13.6

Average wage, % real change

12.5

9.8

6.4

10.4

Disposable income, % real change

10.9

6.5

1.0

8.0

Consolidated Budget balance, % of GDP

-1.9

-2.1

-6.5

-5.0

Public debt, % of GDP

60.9

50.3

62.3

64.1

Current account balance, % of GDP

-4.9

-2.7

3.0

-4.3

USD/UAH, average annual

27.20

25.85

26.90

28.60

SourcesState Statistics ServiceNBUMinistry of Financeforecast by Alfa-Bank Ukraine