Macro Snapshot - Ukraine\'s GDP down by one-fifth in Q1

State statistics committee published Q1 growth data which hit record low since 1990s. Gross domestic product fell by -20.3% y/y versus UkrSib’s forecast of -20.5% and Blb consensus -22%. This could be compared to single-digit GDP decline in neighbouring Russia and 13-18% slump in Baltic countries. Depth of contraction is explained by double trouble – simultaneous drastic fall of exports coupled with collapsing financial intermediation and a halt in domestic demand growth.

We keep our annual forecast for Ukraine’s GDP unchanged, expecting -11.5% full-year contraction in 2009, followed by moderate 1.2% growth in 2010. So far fundamentals have been supportive to reasonably optimistic scenario which is our base case.

GDP deflator has been incredibly high, landing at 22.4% y/y. Prices were nearly stable in industrial production.The heaviest price growth was recorded in rentals (+66.8%) and taxes (61.4%), implying deteriorating competitive advantages and potential for higher inflation and weaker local currency.

Household consumption surprised on upside, declining by just 11.6% in real terms which may be attributed to loose fiscal policy which has helped households to maintain living standards. We expect household consumption to deteriorate over the course of the year as fixed incomes in local currency suffer from inflation. Household consumption will prevent GDP from even sharper contraction but will remain depressed for four to six quarters as balances of government, banks and corporate sectors will have to be repaired prior to increase in wages and social benefits.

Investment nearly halved, recording -48.7% decline. The main culprits for contraction were large excessive (and inefficient) capacities in industry, lack of capital and credit to modernize existing facilities. Inventories declined by $1.8 bn, reflecting pick-up in global demand at the end of Q1.

The state was the sole contributor to demand in Q1, with government expenditures rising by 1.8%. Government will further attempt to increase consumption in order to mitigate the effects of economic decline, but the extent of growing expenditures is limited by already large fiscal deficits and agreements with IMF.

In sectoral comparison, agriculture records positive growth rates (+1.3%), but its weight in Q1 GDP was too small. In Q2-Q3 agriculture will become the key driver which would smooth out declines in other sectors.

Processing industry collapsed by nearly one third while construction recorded 54.1% decline. The biggest surprise for us was mere 14.4% decline in transport&communication. Since transport usually follows the trend of wider economy we would expect a massive 30% correction, slightly offset by communication services which proved to be countercyclical in other crises.