The situation improved in February, but the statistical base played a role
Oleksandra Betliy, Institute for Economic Research and Policy Consulting
According to the Institute for Economic Research and Policy Consulting (IER), real GDP in February 2023 fell by 26.7% yoy (year-on-year, as compared to February of the previous year), which is 7.1 percentage points less than the rate of decline in January. On the one hand, the performance improved in many sectors of the economy in February. On the other hand, in February 2022, there was already a 5-days period of a Big war. So, in the coming months, we may see growth in many sectors, but compared to a very low base of spring 2022.
The most important factor in improving the performance of many sectors of the economy was the increase in electricity production. Since February 12, there has been no shortage of electricity in the Ukrainian energy system, although restrictions have continued to apply in some regions. This was the result of the resumption of operation of two units at nuclear power plants, larger electricity production by hydro electricity generating companies, launched gas piston and gas turbine power plants, and electricity imports.
In February, according to the IER, iron ore production and production in metallurgy increased compared to January. Enterprises in the sector could resume production faster if they had greater opportunities to export their products. But the volume of iron ore exports by rail remains small due to the relatively high cost of transportation and the limited capacity of border crossings. In addition, iron ore cargoes compete for the railway's limited export capacity with grain, as slow inspections of grain cargoes restrict grain exports within the "Grain initiative". Negotiations have just finished and envisaged the extension of the Grain Initiative Agreement for another 120 days.
According to the IER, real gross value added in transport and trade decreased by about 30% yoy in February, compared to 40% yoy in January, primarily due to the statistical base effect. The decline in the processing industry slowed down to 34% yoy. The IER estimates the smallest drop in agriculture at about 11% (reflects only the performance of livestock in January-May), which was able to adapt to the difficult situation, and also began to recover in the liberated territories.
Simultaneously with the improved access to electricity, slightly more than half of the enterprises already emphasize that an important obstacle to their operational activities is logistics problems. This is exactly what the IER monthly survey of businesses showed. In view of this, the agreement concluded last week between Ukraine and Poland to simplify the transit of Ukrainian grains and oilseeds is becoming important. This should reduce queues at the border, which remained long in February.
The IER survey shows that uncertainty remains high for businesses, although short-term expectations of companies are quite positive. But we must take into account that expectations to increase production do not necessarily imply reaching the level of February 2022. One of the obstacles that can become increasingly important for the resumption of activities may be the lack of skilled labor. Thus, in February, 26% of surveyed companies named it among the main obstacles, which was the result of both migration (internal and external) and military mobilization.
The macroeconomic environment remained relatively stable as for the wartime. And inflation slowed in February to 24.9% yoy, compared to 26.6% yoy in December 2022. According to the IER forecast, the growth of consumer prices will slow down somewhat until the end of this year. At the same time, an important factor in inflation in 2023 may be the decision to increase tariffs for housing and utility services for the population, including tariffs for natural gas and electricity. The increase in tariffs in 2023 might be also envisaged in the Letter of intent of the Ukrainian authorities to the new IMF program, which we expect in early April 2023.
