Alexander Paraschiy
Head of Research
[email protected]
+38 044 391 55 77

What are Benefits of the Consumption Growth?

The domestic consumer demand has always been a driving force for the Ukrainian economy. Only in years when the Ukrainians drove up demand, the economy actively advanced.

And today, a key prerequisite for restoration of the economic growth may be an improvement of the consummation pattern in the state. It may, in particular, be a result of improvements in the foreign markets where our producers earn more and spend more or internal stimuli, such as restoration of the public confidence in a better future or activation of consumer lending.

Recent statistics confirm that the consumer demand tends to grow. So, it is clear that the population has better expectations about the future. Based on March results we see that the retail trade turnover grew by 13% yoy. Strengthening of the national currency, which we have seen in the past few months, also fuels our confidence. We also recorded improvements in the industrial production – the Ukrainian industry grew in February and March, for the first time since July 2012. Thus, the macro-economic indicators suggest that we have ridden out the economic crisis, and have a chance to accelerate the domestic demand in the coming months.

What does the domestic demand growth mean for the economy? An obvious advantage is stimulation of the domestic production and, consequently, the economic growth as a whole. It is a visible benefit for the state budget, because the state gets more revenues from the consumption tax. But there are also risks of a rapid recovery in the consumer sentiment. First of all, it is a risk for the national currency and the level of prices, especially when the consumption recovery occurs more rapidly than the recovery in domestic production.

Furthermore, the major portion of our consumer basket is covered by import. And we have already recorded an unprecedented growth of non-energy imports in March, that is, in everything not associated with gas or oil. Such imports grew by 15% in March as compared to 9% in February. Obviously, the further intensification of consumption will promote the import growth. At that, the Ukrainian markets were opened for European goods in early 2016, which significantly simplified import of foreign goods. All this would affect the trade balance of the country. That would not be a problem if we have improved the investment climate. In this case, the outflow of currency because of the significant import growth would be offset by foreign investment funds. Without such a compensator, the risk of hryvna’ meltdown will increase significantly in the immediate future.

Therefore, an improvement in consumer sentiment would be a positive trend for Ukraine and the chance for a quick recovery of the economy. But the government should not have high hopes for the consumer sentiment; they should secure the relevant improvement of potential investors’ attitude as soon as possible. Otherwise, we may enter another zone of the currency turbulence soon.