Macroeconomic forecast: Economic recovery accompanied by accelerated inflation

News 11 december 2020 - 11:00

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


Key points

  • We expect the economy to grow 4.8% in 2021
  • More inflation should push interest rates up
  • Economic recovery provides fiscal consolidation options

Detailed

Over the past months, there have been many signs of recovery in economic activities, which reveal clear prospects of growth in domestic and external demand. In the third quarter, real GDP decline slowed down from 11.4% to 3.5% y-o-y. The recovery trend was damaged by weak harvest of late crops (corn, sunflower), which added about 0.7 p.p. to real GDP decrease in 2020 (4.6%).

As expected, consumer demand has become the primary recovery driver. In particular, that is manifested by an impressive increase of retail trade turnover, which amounted to 15.2% y-o-y in real terms in October, stronger than had been the case prior to the COVID-induced crisis.

According to our estimates, “weekend quarantine” did not impact the economy significantly. Another tightening of quarantine restrictions announced for January 2021 should have more effects on economic activities. However, we expect it to restrain economic recovery only slightly, as these restrictions are rather weak and January is not a heavy month in terms of domestic demand.

According to the baseline scenario, Ukraine’s real GDP is expected to grow 4.8% in 2021. While in real terms the economy should be still slightly lower than in 2019, nominal GDP in USD terms is expected to be 2% higher vs. 2019.

Ukraine’s GDP in 2017-2021, % real change  y-o-y

Sources: State Statistics Service, forecast by Alfa-Bank Ukraine


Acceleration in inflation, which has already begun, would be one of key peculiarities of 2021. Substantial growth in prices for commodities traded by Ukraine that has happened over the past months translates into consumer inflation with varying intensity and pace. The pick-up in consumer inflation should also be facilitated by high wage growth, with the latter to get an extra impetus from a 20% minimum wage hike in January. Generally, vibrant consumer demand recovery is to provide fertile soil for price growth.

We expect Consumer Price Index (CPI) growth to promptly come close to the middle of the NBU’s target range (4-6%) already in December 2020. Then inflation should continue to accelerate, very likely overshooting the target range and reaching 7% by spring. Average annual CPI growth in 2021, according to the baseline scenario, should amount to 7.3%, almost triple the average annual inflation in 2020 (2.7%).

Consumer Price Index (CPI) in 2017-2021, % annual change


Sources: State Statistics Service, forecast by Alfa-Bank Ukraine

Switching to prime rate hikes already in the first quarter of 2021 would be the most likely monetary policy reaction to predominant inflationary risks amid economic recovery. Additional upward pressure on interest rates stems from high needs in local debt roll-over that will be the case at least all along the first half of 2021 (when the amount of UAH T-bills due is double what it was a year ago).
Recovery in domestic demand would facilitate imports outrunning exports in 2021. According to our baseline scenario, foreign trade deficit should expand from 1.5% of GDP in 2020 to 6.5% of GDP in 2021. (For comparison, it was in the 7.8-8.7% of GDP range in 2017-2019.) On one hand, this trend would pose increased weakening pressure on the local currency. On the other, the expected increase in inflows via the financial account of the balance of payments should provide significant offsetting pressure. According to the baseline scenario, the exchange rate should average USD/UAH 28.6 in 2021.
Double-digit nominal GDP growth rate (13% under the baseline scenario) should support public finance stabilization. With responsible fiscal policy, Ukraine has clear opportunities for reducing its fiscal deficit, settling its debt-to-GDP ratio at 62-63% and laying grounds for its reduction in 2022.
Key macro risks in 2021 include sharp worsening of pandemic impact (and response in the form of strong restrictions), significant weakening of external demand for Ukraine’s exports, fiscal unbalancing and inability to secure external financing.

Key macroeconomic indicators


2018

2019

2020f

2021f

GDP, UAH bln

3,561

3,975

4,000

4,523

GDP, USD bln

130.7

154.9

148.3

158.2

GDP, % real change

3.4

3.2

-4.6

4.8

CPI, % average annual change

10.9

7.9

2.7

7.3

CPI, % change Dec-to-Dec

9.8

4.1

4.8

8.0

Average wage, UAH ‘000

8.9

10.5

11.5

13.6

Average wage, % real change

12.5

9.8

6.9

9.5

Disposable income, % real change

10.9

6.5

1.0

8.0

Consolidated Budget balance, % of GDP

-1.9

-2.1

-4.9

-4.4

Public debt, % of GDP

60.9

50.3

62.0

63.0

Current account balance, % of GDP

-4.9

-2.7

3.6

-3.2

USD/UAH, average annual

27.20

25.85

26.96

28.60

SourcesState Statistics ServiceNBUMinistry of Financeforecast by Alfa-Bank Ukraine