The latest issue of “Quarterly Predictions” is out in print, with ICPS’s updated political and economic forecast for Ukraine for the next three years. According to the Centre’s economists, Ukraine’s economy will grow significantly in 2007, slowing to a more moderate pace in 2008. ICPS economists expect real GDP to grow 8% in 2007, 6% in 2008 and 6% in 2009

ICPS analysts have upgraded their forecast for real GDP growth in Ukraine by 1.5pp for 2007, based on a higher forecast for growth in private consumption and exports. Over 2008–2009, real GDP should grow 6% per annum.

Private consumption will continue to be the main driver of growth throughout the forecast period. ICPS analysts say that growth of private consumption over 2007, 2008 and 2009 will be 13.5%, 13%, and 14%. Continuing intensive increases in real salaries will be the main factor behind this growth, as they will rise 14–16% per annum. The high consumption rate will also be driven by a high inclination to purchase major household items and expanding consumer credit.

Growing consumption will be the main factor behind increased investment in sectors oriented on the consumer market. ICPS analysts expect investment activity to remain high throughout the forecast period. An important investment factor in industry will be growing energy efficiency in response to the growing cost of energy. Over 2007, 2008 and 2009, gross accumulation of fixed assets (GAFA) will grow 22%, 14% and 10%.

Over the forecast period, the contribution of foreign trade to GDP will remain negative. The pace of growth of exports will continue to be lower than that of imports, causing the trade deficit to continue to rise. ICPS economists expect the trade deficit to be 4.6% of GDP in 2007. Over 2008 and 2009, it will be 6.9% and 8.9%.

Exports of goods should grow 16%, 12%, and 10% over 2007, 2008 and 2009. The main factor slowing down the pace of export growth will be a worsening situation on external markets for steel and fertilizers. Still, exports of machinery will continue to grow at a fast pace because of growing investment demand among Ukraine’s key trading partners.

Over 2007, 2008 and 2009, imports of goods will grow 20%, 18% and 16%. The main factor behind this slowdown will be a slowdown in investment and shrinking physical volumes of imports of fuels as enterprises become more energy-efficient.

ICPS analysts expect the NBU to maintain a stable hryvnia exchange rate despite the growing trade deficit. Over 2008, the hryvnia should be devaluated to the level of UAH 5.30/USD and the National Bank will maintain this rate throughout 2009 as well.

Despite low inflation figures at the start of the year, ICPS analysts say that the CPI will have grown 9.5% by the end of 2007. Over 2008 and 2009, consumer prices will grow 8% and 6%.

The ICPS forecast is that the tendency for the share of GDP redistributed through the Budget to rise, which was seen throughout 2005–2006, will be less noticeable over the forecast period. By the end of 2007, Consolidated Budget revenues will be 31.2% of GDP. Over 2008 and 2009, this indicator will increase to 31.8% and 32.4% of GDP.

Forecast risks

There are a number of risks that could prevent the actual growth pattern from matching the ICPS forecast:

● The development of a full-blown political crisis, particularly a second set of preterm elections to the Rada at the end of 2008 or beginning of 2009.
● Major fluctuations in world prices for steel and chemical products.
● Growing protectionist policies among Ukraine’s main trading partners.
● A postponement of Ukraine’s accession to the WTO until 2008 or even beyond the forecast period.
● An increase in the price of imported natural gas beyond US $160/1,000 cu m in 2008 and above US $170/1,000 cu m in 2009.
● The launch of major public investment projects over 2008–2009, which will push the pace of investment up.
● The failure to institute the accumulative system of pension insurance during the forecast period.
● A switch to targeting inflation and letting the hryvnia float.
● A further delay in increases for residential services rates to 2008.
● Government price controls on nonmonopoly markets.
● A devaluation of the US dollar to below US $1.40/EUR in 2007.

ICPS economists have been providing regular forecasts for the economic development of Ukraine since 1997. These forecasts are updated quarterly and published in quarterly predictions.

For more information, please go to:
http://www.icps.com.ua