Dispatch from Kyiv: spring returns to Ukraine’s economy

It’s spring in kyiv, where I spent the last week. Oddly enough to say it, there also seems to be a springtime for the economy, even as Russian President Vladimir Putin’s war of annihilation continues in the east and south of the country.

All the anecdotal evidence of growth that an economist would look for is there: thriving retail services, a spate of small business openings, and traffic jams. A phone retailer manager talks about how the business is expanding to more cities. And in less tangible ways, he feels, by the way people walk, by their facial expressions, an energy waiting to be unleashed. If “animal spirits” means anything, this is it, and it’s good news for Ukraine’s economy.

While no one forgets the terrible sacrifices that occur every day and the relentless threat from Russia, I expected a more depressed atmosphere. Okay, I came at a good time. It’s spring, and the winter power outages and blackouts from missile attacks on civilian infrastructure are over. But the return of economic growth is still a bit of a miracle.

The numbers confirm the growth. Several recent studies have projected a decent growth rate. Dragon Capital, a kyiv-based investment group, forecasts 3% growth in 2023 in a note to its clients. The Vienna Institute for International Economic Studies predicts a minor expansion of 1.6 percent. But any positive growth means that we are in a different and much more stable situation than when gross domestic product fell by around 30 percent due to the full-scale invasion of Russia last year.

In fact, the current quarterly growth rate is probably even higher than these relatively optimistic annual rates suggest. When I asked Olena Bilan, chief economist at Dragon, for details, she wrote: “I expect +19% yoy in 2Q23, +9% in Q3 and +2% in Q4, with the slowdown in Q4 attributable to a normalization. of the grain harvest. , after a notable delay last year.

And both forecasts are significantly better than the IMF’s prediction of an additional 3 percent drop in GDP this year. Until recently, in fact, most forecasts were for a stagnant economy (zero growth) at best. The National Bank of Ukraine has a monetary policy press conference today after Free Lunch comes out, but you can check this out to see what it says about the economic outlook.

My impressionistic view of the economy, as seen in kyiv, makes me think that the new positive forecasts are right. Of course, we cannot rely too much on anecdotes and observations, and kyiv is not all of Ukraine. But there is enough analysis and evidence to be confident that the Ukrainian economy is in a better place than many outside observers would think.

We have little experience and therefore may not easily understand what double-digit drops in GDP mean. It is therefore important to note that, in the case of Ukraine, last year’s 30 percent drop largely reflects Ukraine’s loss of territory and population (perhaps around 15 percent of Ukrainians fled the country) and, of course, the physical destruction where the fighting takes place. place. But that’s not the same as a downward spiral across the country. The economist Hlib Vyshlinsky explains this point well; He was recently featured on my colleague Gideon Rachman’s podcast, which is well worth a listen.

The Center for Economic Strategy, which Vyshlinsky runs, has an excellent war economy tracker that clearly shows the many signs of progress. Job vacancies are back to pre-invasion levels. So have many measures of business confidence, which are balanced between expected expansion and contraction, and are steadily improving. A recent NBU slide deck shows that consumer confidence is also improving: consumers’ expectation of how their personal economic situation will evolve is now noticeably more positive than even before the large-scale attack by Russia. And inflation, which the central bank managed to keep from escaping with shrewd policy last year, is falling again.

Facing this are the obvious enormous challenges. Russia’s attacks will continue to be devastating until they are stopped. Apart from the destruction and forcing people to flee, Russia’s blockade of important Ukrainian trade routes is a harsh restriction even for areas where economic activity can take place. I am told that increasing shipping capacity across the western land border cannot make up for the loss of seaborne trade in the foreseeable future.

Then there are finances. Ukraine’s balance of payments and government budget are completely dependent on foreign financing, to the tune of up to a third of GDP when everything is taken into account. This, we must point out, is not an anomaly. It’s the way we should want an ally to run a wartime economy where vast domestic resources must be devoted to defense. The current stabilization and slight upward turn in the economy is due to the fact that the government now has predictable budgetary support from the EU and other partners (among other things, soldiers’ salaries and other military spending help support demand in the economy in general). This has to continue until the war is won, and additional support needs to be accelerated to rebuild what has been destroyed.

A final big question is, how many of the Ukrainians who have had to flee will return and when? So far, few expect or even want many of their relatives and loved ones to return home until the military situation improves.

After my visit to kyiv, I will have many more insights from Ukraine to share in the coming weeks and months. For now, with the caveats I’ve mentioned, I think it behooves us to acknowledge the good economic news, because it brings home some important and under-recognized truths about Ukraine.

One is the remarkable adaptability of Ukrainians, also in economic life. Behind the statistics of a return to modest growth are thousands of stories of rapidly restructured value chains and production and delivery processes. It turns out that this is an extraordinarily nimble economy. Many of the people I spoke to were enthusiastic about Nova Poshta, a postal business that underpins an online retail economy. “I can get a shipment from Kyiv to Kharkiv in six hours,” an executive told me. The level of digitization should also leave many Western European countries (and the US) envious. While this helps in the current dire situation, it also holds great promise for the future.

Second, the large drop in activity (it should be clear by now that “collapse” is the wrong word) sets things up at least for the possibility of very strong growth. The more deeply depressed an economy is, the faster it can grow in the short term. And if the big causes that reduced activity by a third last year are reversed (more wins and the return of the Ukrainians), double-digit growth is entirely possible, even likely.

Third, since much of the economic dynamic is self-reinforcing, a lot depends on whether you can move from pessimistic to optimistic expectations. If the current growth momentum can be sustained, it is likely to accelerate. More Ukrainians will find the risks of returning worth it. Higher tax revenues will give the government more room for manoeuvre. The realization that there is money to be made will begin to attract the attention of foreign investors. I’m not saying this is going to happen, but rather that it’s a plausible scenario, and one that clearly Ukraine’s allies must do their best to realize, if the war doesn’t get worse, and especially if it takes a turn for the better.

Fourth and finally, this means that there are strong economic arguments for increased military support for Ukraine and, specifically, increased air capabilities. If the free part of the country could protect itself against air strikes, then even with stasis on the front lines, you may start to see more people return to their homes and trigger the kind of virtuous cycle I’ve described. From the point of view of Ukraine’s partners, this would alleviate the need for budget support. Therefore, further increasing military support is not only morally correct, but also much cheaper.

other readable

• In my column this week, I argued that the EU could only defend its strategic interests if it was willing to make economic integration with China conditional on Beijing’s actions.

• Speaking of Beijing’s actions, the Australian Institute for Strategic Policy has released a new report showing how China builds influence operations through networks of fake social media profiles.

• Sarah O’Connor laments how poorly Britain enforces its employment laws, the subject of a new report from the Resolution Foundation. The Economist made similar comments recently. As for me, I am happy to see that the car wash continues to be the example chosen to show the state of labor markets.

• EU beekeepers are battling the influx of imported honey adulterated with sugar syrup. Don’t buy cheap honey, people!