A Minute of Economic Optimism

Zero inflation in a warring country is a fiction! However, according to the State Statistics Service, core inflation from June to July in Ukraine was exactly zero. It’s an optimistic note against the backdrop of shelling and the difficult situation at the front.

Meanwhile, consumer prices in July decreased by 0.6% compared to June. However, everything is clear here – all markets are littered with cucumbers and tomatoes, and there is enough zucchini.

Let’s say more: in the express release of the State Statistics Service for July, optimism (justified) is the main background. But this does not mean at all that everything is fine in the Ukrainian economy, and the Russians’ guns are booming only for accompaniment. No, the war against the Russian aggressors is real, and people, military and civilian, are dying for real. Therefore, the optimistic figures of the State Statistics Service are only a sigh of relief and many thanks to those who keep the Ukrainian economy afloat.

Let’s look through the prices. In the consumer market in July, compared to June, prices for food and non-alcoholic beverages decreased by 1.9%. Most of all (by 18.2%), vegetables fell in price (summer cottage houses and vegetable gardens began to produce products, so there is no need to go to the market or the shop). Prices for eggs, cereals, rice, fruits, lard, sunflower oil, and fermented milk products decreased by 7.6%. At the same time, prices for meat and meat products, sugar, fish and fish products, soft drinks increased by 0.5–1.4%.

Prices for alcoholic beverages and tobacco products increased by 1.0%, more for cigarettes (1.5%), less for alcohol (0.6%).

Transportation prices rose by 2.7% mainly due to a 7.3% increase in fuel prices.

In the field of communications, prices almost did not grow – only 0.3%, and even then because of the rise in the cost of postal services.

It turns out that if we exclude the July market with mountains of cucumbers and tomatoes, then, as you can see, prices stubbornly creep up.

In general, from January to July 2023, consumer prices in Ukraine jumped by more than 18%. That is, households have lost almost a fifth of their budgets, and there is no time for optimism. Especially when you consider that most employers are in no hurry to raise salaries. And it is extremely difficult to live on UAH 12–15  thousand per month.

What will happen next?

Let’s postpone the expectations of something better until after the war. Undoubtedly, inflation will accelerate in autumn. In addition to the already ongoing increase in fuel prices and the possible increase in tariffs in the future, growing business activity will push prices higher.

Business is indeed looking to the near future with cautious optimism. This is evidenced by the latest study of business expectations, conducted by the National Bank.

So, for the first time since the start of a full-scale war, business expects an increase in business activity in the next 12 months. Against the backdrop of the restoration of the energy system, the gradual recovery of domestic demand and the strengthening of the hryvnia, respondents expect an increase in the volume of production of goods and services and are also positive about the prospects for the development of their own enterprises. At the same time, inflation and exchange rate expectations improved. That is, prices and rates, according to entrepreneurs, will not “gallop.”

So, in accordance with the data of surveys of business representatives in the next 12 months, the following trends are expected:

• growth in the production of goods and services: balance of answers – 17.0% with a plus sign (for comparison, in the first quarter we saw minus 16.7%);
• significantly lower inflation – consumer price growth by 15.7% (20.7% in the previous quarter);
• further weakening of devaluation processes: the average value of the exchange rate is UAH 40.43/USD (in the first quarter of 2023 we saw 42.18 UAH / USD, and today the exchange rate of the cash dollar is approximately 37 UAH);
• revival of business activity: business expectations index is 104.5% (in the previous quarter it was 91.2%), that is, this factor is already improved!

Yes, devaluation of the hryvnia is most likely inevitable. Although ... they have been talking about the dollar at 40 for a long time, but it is still at 37.

The growth in the production of goods and services in Ukraine is expected by the surveyed enterprises of all directions and types of activity, but most of all:

• by type of economic activity — energy and water supply enterprises;
• by size — large companies;
• by line of business – exporters and importers.

By regions, 15 regions expect growth, most optimists being in the Chernihiv region. The fall in the production of goods and services in Ukraine is expected in Sumy, Kirovograd, and Odesa regions. Enterprises of the Ternopil and Khmelnytskyi regions expect the volumes of production of goods and services to remain at the current level.

As for macroeconomic indicators, business expects inflation at the level of 15.7% (in the previous quarter it was at 20.7%). It should be noted that the data of the State Statistics Service on inflation expectations are almost synchronous with the data of the survey conducted by the National Bank of Ukraine. However, there is nothing to rejoice at, 15% is also a lot.

With this seasonal inflationary optimism and the expectation of further economic growth in the country, the surveyed business owners assess the financial and economic condition of their companies as weak, although negative assessments have softened somewhat.

Apparently, they also understand that the current improvements can only be a short respite before the next crisis marathon. We hope they stock up on strength and resources.

Read this article in Ukrainian and russian.