A sad feature of recent times has been the war that is raking place in Ukraine. This gives us our first but by no means last reminder of the novel 1984 as of course we are told officially that there is a peace deal in operation. This was signed in Minsk in February. So war may indeed be peace and those involved in Ukraine may be forgiven for thinking that a type of perpetual war is being inflicted on them. Just to rub home a triumvirate of themes we have of course Ukraine being squeezed by two super-states with Europe manoeuvering on one side and Russia on the other. As it happens to the two super-states are using different means as the Russia effort is military and the European one is more financial. Indeed if we add in the United States we can wonder if the fall in the oil price last year (with consequent impact on oil-producing Russia) was part of the super-state clash.
The consequence of this for the economy of Ukraine is something that I have feared for a while. Back of the 20th of January 2014 I pointed out the problems being faced.
The economy of the Ukraine is extremely unbalanced as a resources rich country should not be running trade deficits of this size.
Back then I pointed out then the International Monetary Fund (IMF) had been in Ukraine for five years and it had been supposed to be dealing with this whereas instead it found itself issuing communiques like this below.
Weak external demand and impaired competitiveness kept the trailing 12-month current account deficit elevated at about 8 percent of GDP by end-September despite a significant reduction in natural gas imports.
You are in a shabby state when you have a bigger current account deficit than the UK! Also interest-rates were very high with the official one of 6.5% being not the half of it.
actual borrowing interest-rates in the Ukraine have varied between an eye-watering 14.9% and 20.2% so far in 2014. Savers are getting an equally extraordinary real yield as the latest guide to them shows an interest-rate of 13.2%.
If you were setting out to cause an economic contraction you would be hard-pressed to do better than this. But there was a third issue which has been an influence which was that Ukraine a country which has its own currency the Hryvnia also saw use of the US Dollar too. Partly this was driven by the difference between actual and official exchange-rates as a black market arose in response.
What happened next?
Interest-rates blasted higher. It was only on Friday that I analysed the way that Sweden has moved into negative interest-rates whereas now we find ourselves looking at a National Bank of Ukraine which has raised rates from 6.5% to 9.5% to 12.5% to 14% and in February of this year to 19.5% and in March to 30%. The icy cold of a Swedish interest-rate winter has been replaced by a Ukrainian heat wave. Or as Matha & The Vandellas put it.
It’s like a heat wave
It’s burning in my heart
I can’t keep form burning
It’s tearing me apart
On a stand-alone basis such an interest-rate would drive a currency higher but in this instance it was an attempt to deal with a plummeting Hryvnia. Back on January 20th 2014 I noted that it took 11.18 Hryvnia to buy one Euro now it takes 23 to do so. Therefore it has halved in value and there have been times when it has been much worse as the peak or nadir was around 38 Hryvnia to the Euro in late February.
The consequences have been horrendous
If we think of the likely consequence of the first influence above it would be of a sharp recession and the latter of high inflation. The latest NBU economic review puts it thus.
The decline in economic activity notably deepened in April (the Index of Core Industries Output (IKSO) decreased by 23.4% yoy) due to a further deterioration of industrial production and a worsening wholesale trade performance.
That is simply horrible and even worse than the official Gross Domestic Product data. From the State Statistics service.
The GDP of Ukraine for Q I, 2015 as compared to Q I, 2014 (at the constant prices of 2010) comprised 82,4%, when compared to Q IV of 2014 and seasonally adjusted it comprised 93,5%.
The situation concerning inflation was dire too. From the NBU.
In April, consumer inflation surged further up to 60.9% yoy driven by a 5.5-fold increase in the natural gas tariffs for households. Excluding the administrative component, the price growth decelerated for the first time since February 2014 to 46.9% yoy.
In the month of April alone prices rose by 14% which was driven by the rising price of gas. The sub-component which includes water housing and electricity (which rose by 33.6% itself in the month) too more than doubled (209.7%) in April. Just as most of the world was getting used to lower prices for domestic fuel they blasted higher in Ukraine. As it is an obvious essential in the cold winters that happen there this is quite a change in the basic cost of living. The only thing to be grateful for is at least winter had at least pretty much passed by for now.
Sadly the situation for that other essential food is dire too.
Processed food prices rose by 6.6% mom (59.5% yoy) reflecting the lagged effects of hryvnia devaluation and the ongoing pass-through of growing energy and raw food prices……..Raw food inflation moderated to 2.6% mom. In particular, the growth of prices for fruits and vegetables slowed to 2.3% mom and 3.4% mom, respectively,
In a world where to use modern language inflation is apparently like so over, it provides not a little to consider when a place thinks of inflation of 2.6% for food as being evidence of a slow down.
Mind you care is needed as according to central bankers and their acolytes you only need to look at core inflation which ignores the cost of food and energy!
Meanwhile back in the real world I note this.
Amid growing inflation, real wages fell by 24.6% yoy in March.
Even the IMF seems to be struggling to claim this is all “on track” as we find from yesterday’s press release.
Accordingly, the mission has revised down growth projections for 2015 to -9 percent and projects end-year inflation at 46 percent.
Although the “on track” doublespeak does make a sort of appearance.
In recent months, signs that economic stability is gradually taking hold are steadily emerging.
Is forecasting year-end inflation of 46% a sign of stability? I know that official bodies are often inflation fans but even the most ardent fans of inflation usually aim for a number less than tenth of that!
Oh and is Sunday the new day “to bury bad news?”
What stands out here is the similarity between Greece and Ukraine. Except the economic collapse which took half a decade or so in Greece has been managed in just over a year in Ukraine. There are familiar features as the IMF imposes austerity on an economy which was already shrinking. Here is its view from March.
Policies to underpin the fiscal adjustment include improving the pension system’s sustainability, reforming public employment, and reforming the healthcare and education systems.
So the prize for euphemism of the day goes to “improving the pension system’s sustainabilty” as we know what that means. Meanwhile the IMF tries to tell us that the same price is in fact in a universe far,far,away…..
Despite the authorities’ policy efforts, the economy fell into a deep recession in 2014.
In a way the statement below is a type of ultimate irony or is it what passes for an in-joke at the IMF these days?
The planned debt operation would also help secure program financing and restore debt sustainability with high probability.
Just like Greece? Oh hang on…….