Oleksandra Betliy, Institute for Economic Research and Policy Consulting

According to IER estimate, in January 2023 the pace of contraction decelerated in most sectors of the economy. However, due to the peculiarities of the Ukrstat methodology, the overall indicator of GDP decline deepened to almost 34% yoy. While in December 2022 agriculture made a positive contribution to GDP growth due to large volumes of maize harvesting, in January the impact of this sector on economic development indicators was minimal, although harvesting continued. This was because crop production indicators are not taken into account in agricultural production indicators between January and May.

At the same time, due to russia's deliberate slowdown in ship inspections within the Grain Initiative, the performance of transport deteriorated. The exports of grains and oilseeds through seaports fell in January to 4.0 million tons from 5.1 million tons in December. Also, exports of crop products by roads have slightly decreased, probably due to further long phytosanitary control by Poland. It is worth noting that in January and early February, representatives of several Eastern European countries have already made calls to restrict the import of Ukrainian grain to their markets due to increased competition. At the same time, these calls are unlikely to lead to imposed restrictions by the EU. Simultaneously, in January, according to the IER, the decline in trade and construction slowed down somewhat, which was a consequence of the effect of the statistical base.

Also, IER estimates that the contraction of industry somewhat decelerated. In the extractive industry, this was the result of a certain increase in iron ore and gas extraction compared to December 2022. Enterprises in manufacturing further adapted to interruptions in the supply of electricity. In particular, they expanded the use of generators and devices in uninterruptible power supply as well as introduced changes in work schedules. At the same time, price statistics do not yet show that business transfers higher costs associated with a lack of electricity to consumers. According to the Ukrstat, consumer inflation in January slowed down to 26.0% yoy, compared to 26.6% yoy in December 2022.

The improvement of the situation in the industry is also indicated in the results of a monthly business survey conducted by the IER. Thus, the business assessment of the current situation for both production and sales improved. The main impediments to the business operation remained unchanged in January. The key one is related to problems with access to electricity. In the future, the situation might improve thanks to the government’s decision on the provision of guaranteed electricity supply for companies that import electricity. The increase in prices for raw materials and other factors of production is the second most important obstacle. The share of businesses that define the danger of work as an impediment to their operation has slightly decreased. This might be explained by the somewhat lower intensity of shelling by russians as compared to November and December. At the same time, logistics problems remain important, and more companies defined the difficulties with internal logistics as a challenge.

It is essential that the IER survey shows that the business is optimistic both for the coming months and for the next two years. Moreover, the level of uncertainty for the short-term period has reduced. This gives reason to hope for the further recovery of economic activity in Ukraine. Indeed, according to experts of IER and GET, real GDP is expected to grow by 1.8% in 2023.