Consumer inflation in Ukraine is accelerating (up to 17% yoy in May from 16.4% in April), according to the NBU Macroeconomic and Monetary Review that was published on June 6.
The main factors accelerating inflation are "supply shocks":
- production and supply chain disruptions;
- destruction to production capacities and infrastructure;
- occupation of territories
The consequences of these are the emergence of local or temporary deficits (fuels, salt), increased business costs, a shock rise in prices in the occupied territories
Deteriorating inflationary expectations of business and the population foster the inflation acceleration as well.
At the same time, the factors restraining inflation are increasing. For instance, due to the surplus of agricultural raw materials amid limited export capacity, there is a downward pressure on the prices of a number of food products (flour, bread, oil, meat and dairy products, and eggs)
A moderate acceleration in prices for services and non-food products is largely restrained by a decrease in consumer demand.
Introduction of a moratorium on raising heat tariffs and gas distribution for the period of martial law by the Cabinet of Ministers restrains inflation as well.
Economic activity in Ukraine
In May, economic activity recovered both in the manufacturing and service sectors. However, the NBU notes that the recovery of services is partly due to the seasonality factor.
The number of enterprises that completely ceased their activity fell to 14% in the second half of May (17% in April), but the overall capacity utilization rate remains 40% below pre-war levels
The loss of markets and increasing price pressure are holding back the recovery. The negative impact of disrupted logistics, in particular fuel supplies, is persistently significant.
The assessment of the strength of enterprises has also improved. In May, the number of enterprises that did not experience problems with lack of resources increased (up to 36%). 40% of respondents will have enough resources for more than a month.
The activities of a number of metallurgical and mining enterprises revived in May, energy infrastructure is being rebuilt.
In the mining and metals sector, some producers continue to get out of conservatorship and increase capacity, in part due to the abolition of customs duties by Western countries. Some enterprises report they have resolved the problems with export logistics and created new transport corridors
Coal production by state-owned mines has fallen by 37% since the start of the war. Some private companies continue to operate and increase hiring to ramp up volumes, including due to the establishment of new export routes.
Gas production is increasing due to the launch of new inter-industrial gas pipelines in the central and eastern regions. Some private companies brought mining to pre-war levels.
Exports of electricity to Moldova have started against the background of declining domestic consumption. Ukrhydroenergo is ready to start exporting electricity to Poland.
Food producers resume work in the de-occupied territories, introduce new and reopen existing production facilities in the western and central regions. Excess raw materials and the reorientation of consumers to more affordable and cheaper domestic products support the expansion of the product range. The industry is constrained by export restrictions, reduced purchasing power and rising production costs due to logistical difficulties and rising energy prices.
Engineering is supported by the needs of the energy, transport and mining industries and the production of special equipment, in particular through foreign contracts and government procurement.
Some large pharmaceutical companies have reached the pre-war level of production, in particular thanks to the production of drugs for defense and due to increased export opportunities.
A number of clothing and equipment manufacturers have restarted operations in the west of the country and increased production, working for the needs of the army.
Sowing of spring cereals and legumes as of May 26 was completed by 78% of last year's levels (13.2 million hectares or 93% of the plan of the Ministry of Agriculture for this year, which is 16% less than last year).
There is a significant recovery in the transport sector: freight traffic by Ukrzaliznytsia (UZ) resumed up to 45% of pre-war capacity, an additional border crossing was opened for grain cargo transportation However, the queues at the western crossings are still significant, and the UZ export capacities are limited by the lack of border infrastructure and the consequences of the shelling.
Housing construction has resumed in all regions remote from hostilities; housing construction works were also resumed in de-occupied cities. Reconstruction and overhaul of damaged houses and social infrastructure premises have been started in Kyiv.
Construction is largely supported by the orders for restoring transport infrastructure and creating new production facilities in safe areas (construction of factories, granaries, etc.)
State of labor market in Ukraine
Despite a reviving economy, demand for workers remains subdued, and supply notably exceeds demand.
According to the NBU surveys, the share of the following enterprises has stabilized:
- those that significantly cut staff (over 30%)
- those that did not change the number of employees.
The weighted average employment rate has improved, which, however, may be due to seasonality. It is still 25% lower than before the war (40% in early March).
The increase in the number of vacancies is significantly lower than the increase in resumes, even for IT specialists.
Most companies are unable to pay pre-war wages. According to various surveys, the fall in wages in the private sector averaged 25% to 50% compared to pre-war times. Agricultural enterprises dominate among those who have not changed or even increased wages.
In May, compared to April, salaries were raised for drivers, physicians and pharmacists, as well as in manufacturing and agriculture.
Household incomes are supported by social benefits, higher pensions, and increased payments to the military servants.
Balance of payments of Ukraine
In April, the merchandise trade balance returned to the deficit. Exports of goods remained almost at the level of March, comprising only a half of last year's volumes. Imports of goods in almost all major groups of products, but imports of motorcars did the most.
At the same time, sizable international financial assistance, resilient remittances, lower reinvested income, and suspension of dividends helped maintain the current account surplus.
Compared to March, exports of food products increased somewhat, primarily on account of sunflower oil, oilseeds and meat.
The decline in exports of iron ores and ferrous metals persisted due to the destruction and conservation of production facilities, difficulties with the shipment of products for export, and the available logistics routes being highly loaded.
Even if transportation capacity reaches its potential, it would allow exporting less than 50% of the pre-war grain exports.
The UZ export capacity is restrained by:
- insufficient transshipment capacity at borders;
- shortage of wagons in Europe (the share of railway transportation in Europe comprises around 15-35% of the total, in Ukraine — 65%);
- the need for "changing shoes" for Ukrainian wagons (different gauges) or shredding trains (for example, in Moldova due to the unsatisfactory track condition);
- bureaucratic procedures (phytosanitary control, product quality control, and the need to coordinate movements)
Country's defense needs, as well as the gradual resumption of industrial and commercial enterprises activity, led to increased purchases of non-energy goods: machinery, food, and industrial goods. Liberalization of merchandise imports taxes was an additional factor in its recovery. The NBU notes that it stimulated an increase in imports of not only essential goods. Compared to March, imports of the following goods increased in April:
- motorcars — 10 times;
- mobile phones — almost doubled;
- washing machines — almost quadrupled;
- mollusks — more than 3 times;
- sinks, washbasins — 13 times;
- decorative glassware — 13 times;
- imitation jewelry — has doubled.
Disbursed international financial assistance helped partially compensate for large FX interventions of the NBU, which helped to maintain international reserves at a fairly high level.
In May, the state budget deficit continued to grow, and in Jan-May 2022, the negative balance exceeded the annual deficits in the previous two years.
The budget revenues continued to decline, however, their decline slowed somewhat supported by both tax and non-tax revenues (in April, the latter plunged as the NBU transferred its profit earlier)
Due to the decline in economic activity and provision of tax benefits, the tax revenues continued to decrease. The suspension of VAT refunds remains a "weakness" of domestic tax developments.
The budget expenditures expectedly surged, primarily those directed to defense needs and social programs. At the same time, the financing of many expenditures was completely stopped or made when necessary.
The state budget deficit was covered by international and monetary financing. Let us note that in this case, monetary financing is actually the issue of the hryvnia, for example, in the form of purchasing military bonds by the National Bank.