It is spring in Kyiv, where I have spent the past week. Strange though it feels to say, there also seems to be springtime for the economy, even as Russian president Vladimir Putin’s war of annihilation rages on in the east and south of the country.
All the anecdotal evidence of growth that an economist would look for is there: thriving retail services, a rush of small business openings and traffic jams. A manager at a phone retailer talks of how the business is expanding into more cities. And less tangibly, you sense — from the way people walk, from their facial expressions — an energy just waiting to be unleashed. If “animal spirits” means anything, it means this, and it’s good news for Ukraine’s economy.
While no one is forgetting about the terrible sacrifices happening every day, and the unceasing threat from Russia, I had expected a more depressed atmosphere. Granted, I came at a good time. It is spring, and the winter power failures and blackouts from missile attacks on civilian infrastructure are over. But the return of economic growth is still a little miraculous.
The numbers confirm the growth. Several recent studies have projected a decent growth rate. Dragon Capital, a Kyiv-based investment group, predicts 3 per cent growth in 2023 in a note to its clients. The Vienna Institute for International Economic Studies predicts a lesser 1.6 per cent expansion. But any positive growth at all means that we are in a different and much more stable situation than when gross domestic product fell by about 30 per cent because of Russia’s full-scale invasion last year.
In fact, the current quarterly growth rate is probably higher still than suggested by these relatively optimistic annual rates. When I asked Olena Bilan, Dragon’s chief economist, for details, she wrote: “I expect +19% y-o-y in 2Q23, +9% in 3Q and +2% in 4Q, with the slowdown in 4Q attributable to a normalization of grain harvesting, after a notable delay last year.”
And both forecasts are significantly better than the IMF’s prediction of a further 3 per cent fall in GDP this year. Until recently, in fact, most forecasts were for a stagnant economy (zero growth) at best. The National Bank of Ukraine has a monetary policy press conference today — after Free Lunch goes out but you can check this out to see what it says about the economic outlook.
My impressionistic take on the economy, as seen in Kyiv, makes me think the new positive forecasts have it right. We cannot rely too much on anecdotes and observations, of course, and Kyiv is not all of Ukraine. But there is enough analysis and evidence to feel confident that the Ukrainian economy is in a better place than many outside observers would think.
We have little experience and hence may not easily grasp what double-digit falls in GDP mean. So it is important to note that in the case of Ukraine, last year’s 30 per cent fall largely reflects Ukraine’s loss of territory and population — perhaps about 15 per cent of Ukrainians fled the country — and, of course, physical destruction where fighting is taking place. But that is not the same as a downward spiral everywhere in the country. The economist Hlib Vyshlinsky makes this point well; he was recently featured in my colleague Gideon Rachman’s podcast, which is well worth a listen.
The Centre for Economic Strategy, which Vyshlinsky leads, has an excellent war economy tracker that clearly shows the many signs of progress. Job vacancies have returned to levels from before the full-scale invasion. So have many business confidence measures, which are balanced between expected expansion and contraction, and are steadily improving. A recent slide deck from the NBU shows that consumer confidence is improving too: consumers’ expectation of how their personal economic situation will evolve is now notably more positive than even before Russia’s full-scale attack. And inflation, which the central bank managed to keep from running away with astute policy last year, is falling again.
Against this are the obvious enormous challenges. Russia’s attacks will continue to be devastating until they are stopped. Aside from destruction and forcing people to flee, Russia’s blocking of important Ukrainian trade routes is a hard constraint even for areas where economic activity can take place. I am told that boosting transport capacity across the western land border cannot in the foreseeable future compensate for lost marine trade.
Then there are the finances. Ukraine’s balance of payments and government budget are completely reliant on foreign financing, to the tune of up to one-third of GDP when everything is taken into account. This, we should note, is not an anomaly. It is the way we should want an ally to run a wartime economy where vast domestic resources must be devoted to defence. The current stabilisation and slight upward turn of the economy come because the government now has predictable budget support from the EU and other partners (among other things, soldiers’ salaries and other military spending help to support demand in the wider economy). This has to continue until the war is won, and additional support to rebuild what has been destroyed needs to be accelerated.
A final big question is, how many of the Ukrainians who have had to flee will return, and when? So far, few expect or even want many of their relatives and loved ones to come back home until the military situation changes for the better.
After my Kyiv visit, I will have many more observations about Ukraine to share over the next weeks and months. For now, with the caveats I have mentioned, I think it behoves us to recognise the good economic news, because it brings home some important and under-recognised truths about Ukraine.
One is the remarkable adaptability of Ukrainians, also in economic life. Behind the statistics of a return to modest growth are thousands of stories of rapidly restructured value chains and production and delivery processes. This is an extraordinary agile economy, it turns out. Many of the people I spoke to raved about Nova Poshta, a postal business that underpins an online retail economy. “I can get a shipment from Kyiv to Kharkiv in six hours,” one executive gushed to me. The level of digitisation, too, should leave many western European countries (and the US) envious. While this helps in the current dire situation, it also holds enormous promise for the future.
Second, the big fall in activity — it should be clear by now that “collapse” is the wrong word — sets things up for at least the possibility of very strong growth. The more deeply depressed an economy is, the faster it can grow in the short run. And if the big causes that lopped off a third of activity last year turn round — more victories, and Ukrainians returning — double-digit growth is entirely possible, even likely.
Third, since a lot of economic dynamics are self-reinforcing, a lot hinges on whether you can turn from pessimistic to optimistic expectations. If the current growth dynamics can be sustained, they are likely to accelerate. More Ukrainians will find that the risks of returning are worth it. Higher tax revenues will give the government greater room for manoeuvre. The realisation that there is money to be made will begin to get the attention of foreign investors. I am not saying this will happen, but that it is a plausible scenario — and one that is clearly in Ukraine’s allies to do what they can to realise — if the war does not take a turn for the worse, and especially if it takes a turn for the better.
Fourth and finally, this means there are important economic arguments for more military support for Ukraine, and greater air capabilities specifically. If the free part of the country could be made safe against air attacks, then even with stasis on the front line you may start to see more people returning home — and triggering the sort of virtuous cycle I have described. From the point of view of Ukraine’s partners, this would lighten the need for budgetary aid. So, to increase military support further is not just morally right, it is also much cheaper.
Other readables
In my column this week, I argued that the EU would only be able to defend its strategic interests if it was willing to condition economic integration with China on Beijing’s actions.
Talking about Beijing’s actions, the Australian Strategic Policy Institute has published a new report showing how China builds influence operations through networks of false social media profiles.
Sarah O’Connor laments how poorly Britain enforces its labour laws, the topic of a new Resolution Foundation report. The Economist made similar points recently. As for me, I am happy to see that the car wash remains the example of choice to show the state of labour markets.
EU beekeepers are fighting an influx of imported honey adulterated with sugar syrup. Don’t buy cheap honey, people!
Source: Economy - ft.com
