2009

Economy Recession: Second Wave or Tsunami?

Some signs of economic revival were seen in Ukraine in May-June. That allowed many to state that the recession was almost passed. However, we argue that the there can be serious worsening of economic situation in near future.

In today’s Ukrainian case it is more correctly to say about adaptation or correction of plans rather than about revival. Indeed, latest month-to-month comparisons turn to be unimportant if to take into account the fact that industrial fall has permanent range for all periods of the first half of
2009 for all economy and main export industries (except rather food processing, where import substitution happened thanks to hryvnia devaluation, like in 1999). Some improvements in banking crediting happened due to temporary accumulation of population deposits, but capacity of this resource is pretty limited.

So currently it is a period when firms and people adapt their behavior to live under new conditions. Now they can plan, but it does not mean really better financial positions. Besides, some factors (workplaces, spending, etc.), previously postponed for a few months, start working. However, effect of those factors is temporary.

The main risky factor of Ukrainian recession is that government is reluctant to implement systematic actions to save the economy. Contrast to the EU, Ukrainian authorities do next to nothing to lower taxes, support small business and investments into infrastructure projects. Some efforts to support key exporting industries do not save all the economy.

Recent IMF financing will not save the economy either. A part of a new loan will pay bank debts, another part will go to cover state budget deficit. But real budget deficit is several times more than this financing and there are other reserves to cover it (tax collections are exhausted).

Because of the presidential elections, the prime minister will not cut social expenditures. So the way to finance budget deficit. This will add more instability in already misbalanced economy. That is why the period of the end of 2009 or early 2010 will face not only the second wave of the crisis, but also a variant of economic tsunami.