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Monthly statistics are deceptive for analyzing the health of the economy

June 18, 2009

At the beginning of last week data on industrial output in May was released that showed a month-on-month growth of 1.3 percent. The key sectors in Ukraine’s economy, metallurgy and the food industry, grew by 7.2 and 5.7 percent, respectively, Among other industries that demonstrated growth were the mining industry (+1.7 percent), production of coke and oil refinery (+0.2 percent) and the production of non-metallic mineral products (+10.2 percent).

Based on these statistics, some statements have been made that the bottom of the crisis has been reached and the economy is starting to grow. Such declarations are wrong in their root and are based on deceptive monthly statistics, without taking into consideration other indicators and fundamental factors.

Firstly, the comparison between May and April is misleading because May is one day longer. And, even if the daily industrial output remains the same, the statistics will reflect a 3.3 percent growth because of the extra day. Most large industrial sites work seven days a week; that’s why the number of days in a month has to be taken into account.

Therefore, if one takes average daily production figures instead of the monthly figures, they appear much more modest: the average production in May was 2 percent down compared to April. Daily averages only grew in metallurgy (3.9 percent), the food industry (2.4 percent), and the production of non-metallic mineral products (6.9 percent). In the rest of the industries the daily averages were down.

Therefore, a revision based on the number of days gives a much less cheerful picture of the state of Ukraine’s economy.

Secondly, the comparison between May and April is unreasonable due to the seasonal nature of some industries. Primarily we’re talking about the food industry as well as the production and distribution of electric energy, gas and water, but this factor needs to be taken into account for other industries as well.

Adjusting for the seasonal nature of some industries can be made be comparing industrial output in May year-on year, with the same figures in April. In May 2009 industrial output dropped by 31.8 percent year-on-year, just as in April. Improvement in year-on-year performance was seen in the mining industry (-33.1 percent in May, compared to -32.9 percent in April, year-on-year), food industry (by 0.7 percent, to - 2.1) production of non-metallic mineral products (by 3.7 percent, to -44.3), and metallurgy (by 2.1 percent, to -43.4). The rest of the main economic sectors saw a drop of year-on-year performance: the production of consumer goods dropped by 2.4 percent to -21.4 percent year-on year, the chemical industry sank by 4.5 percent to -33.1; machine building declined by 0.4 percent, to -53, and electricity, water and gas production and distribution fell by 0.6 percent to -20.9.

Thus, even a quick glance at the annual statistics shows that the decline of Ukraine’s economy is continuing – albeit more slowly than at the end of last year and the beginning of this year, when the decline increased by tens of percentage points per month.

The positive dynamics of the food industry are seasonal fluctuations. To talk about positive trends in metallurgy, there has to be growth for several consecutive months. However, the May growth looks more like a positive correction than the beginning of a long-term trend, and this could have been the result of the growth of stocks.

Thirdly, the conclusion about the bottom of the crisis in Ukraine’s economy does not take into account a few fundamental factors that would promote growth in some sectors.

In 2003-2008 the economy primarily grew through an increase of foreign trade activity, especially in export-oriented sectors of the food industry and agriculture, metallurgy, chemical and heavy industries.

During the crisis our foreign trade partners are closing investment projects, their business activity is declining, and – as a result – the global demand for metal and chemicals has fallen significantly. The demand for the output of Ukraine’s heavy industry also dropped due to the fact that the main buyers – former Soviet countries – are also hit hard by the crisis, thus halting many investment projects.

The only sector where Ukraine’s prospects don’t look so grim is the food and agriculture industry. The demand for food in relation to income is nonelastic, meaning that demand does not drop sharply as a result of a reduction of income. The hryvnia’s devaluation has made the Ukrainian products more attractive on the world market, in terms of its price. This is especially evident through the plant oil production: it grew by more than 90 percent in year-on-year terms, and the lions’ share of the output is exported.

Another fundamental factor that would have to be in place before economic growth could be expected is an improvement of the financial sector, and renewal of lending for the real sector. This factor is not there yet.

Therefore, neither a statistical analysis, nor the analysis of fundamental factors gives us grounds to assert that the bottom of the crisis has been passed and that the Ukrainian economy is entering a stage of growth.

So, what can we expect in the near future?

The global economy is starting to display the first feeble signs of recovery, but economists continue to express their apprehensions that the second wave of the crisis can take place in autumn. If one assumes the most favorable, V-shaped exit of the global economy out of the crisis, and even if the global markets liven up by autumn 2009, the Ukrainian economy will scarcely be affected by the positive tendencies before end-2009 or early 2010. The presidential election will become an additional factor decelerating the growth of liquidity in the banking sector, because the parent companies will be careful about taking decisions to credit their daughters, while investors will be wary of entering the market in times of political instability.

If the short-term recovery in the global economy is followed by a new decline, following a W-shape, the growth of Ukraine’s economy will be postponed until better times, when the global economy starts to grow. This is not likely to happen until the second quarter of 2010.

The good news is that the Ukrainian economy dropped so sharply, and the demand for Ukrainian export is so low at the moment, that even a new wave of global crisis will not significantly reduce demand for Ukrainian-made goods, and the Ukrainian economy can only sink insignificantly.

So, tendencies in the global economy point to the conclusion that before 2010 the revival of Ukraine’s economy is unrealistic, and reports of the beginning of economic growth are premature.

Prepared by Mykhaylo Salnykov, an economist with “Sokrat” investment group. He can be reached by email:

Press Service of the ‘Sokrat’ investment group
Elena Kolesnichenko
Tel/fax: +38 044 207 01 00

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