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Why is the economy slipping

Ukraine’s GDP dips first time since 1999
20 September, 00:00

In August 2005 Ukraine’s real gross domestic product (GDP) declined by 1.6 percent as compared to the same period last year, while GDP growth in January-August was 2.8 percent, compared to last year’s, according to an Interfax Ukraine report, citing a government source and data supplied by the State Statistics Committee.

This has been the first month-to-month drop in GDP since 1999. After real GDP growth accelerated in March 2005 to 5.2 percent, it slowed down to 3.9 percent in April, 3.6 percent in May, 1.1 percent in June, and increased to 2.4 percent in July.

The sacked Ukrainian government downgraded its 2005 GDP growth forecast from 8.2 percent to 6-6.5 percent with a 9.8 percent inflation forecast. In 2006 GDP growth is expected to accelerate to 7 percent with 8.7 percent inflation.

Forecasts aside, the question of why the GDP is continuing on a downward trend remains unanswered.

COMMENTARY

Valeriy LYTVYTSKY, head of a group of aides to the National Bank of Ukraine governor:

“There are several factors behind the slowing GDP growth. First, all global economic forecasts have been sharply downgraded. Second, it is clear that the economy was overheated last year, and by the end of this summer this became obvious. Third, we must not discount the mistakes made by the former government. Of course, the budget was good as far as its social aspect is concerned, but growing tax pressure is dangerous for the economy as a whole. This circumstance was overlooked. Nonetheless, in 2005 it is still possible to stop the slowdown in the economy’s growth so as to avoid a recession. Now the country faces a new challenge: the slowdown in GDP growth is reaching the point where a recession might start. The second occurrence of macroeconomic anemia in the past six years is more acute than the one that was experienced in 2002. The negative dynamics of the key macroeconomic indicator already in August caused the growth of the nation’s cumulative income to go into a background, residual (1-2 percent) growth mode; keep in mind that in 2000-2004 the economy displayed accelerated growth averaging at 8.3 percent. We may not rule out pre-stagnant dynamics in the first months of 2006, when GDP growth may be at the zero level. The inertial growth potential that formed in 2003-2004 has been almost entirely exhausted in the last two months. The downward phase of the business cycle, which began in the fourth quarter of 2004, was prolonged. And now the growth slowdown is becoming more acute. The government crisis and the early start of the election campaign have further undermined investor and consumer confidence. Rising international and domestic fuel prices are reducing the percentage of gross added value in the structure of production and also stifling GDP growth.”

Vitaliy MELNYCHUK, vice president of the asset management firm Kinto:

“It is somewhat incorrect to compare this year’s August GDP growth indicators with August 2004. Different projects might have been launched in each of the months, which could have ended last year but continue this year. It would be more accurate to compare January-August growth indicators from this year with 2004. Last year the GDP depended on many factors, such as unreturned VAT and various unauthorized payments. Were GDP growth indicators last year really what politicians claimed they were? To properly assess last year you have to bear in mind that astounding GDP growth was not accompanied by adequate growth in personal incomes. Budget revenues grew disproportionately, which gives rise to the question of where all the money went. This year we have seen budget revenues grow hand in hand with personal incomes, whereas GDP growth is slower. Why has this happened? It should also be noted that this year’s electricity consumption growth virtually matches GDP growth, which is the way it should be. Last year these indicators were absolutely different, and the difference between them was substantial. We must not forget that ours is a transition economy, which is why the question of macroeconomic indicators is not a crucial one. An issue of far greater concern is the fact that the country is losing its attractiveness to investors and its business climate is deteriorating. Now that you have started comparing GDP growth indicators, you must carefully examine the accuracy of all the data.”

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