It’s spring in Kiev, where I spent the last week. Strange as it may seem, there also seems to be a springtime for the economy, even as Russian President Vladimir Putin’s war of annihilation rages on in the country’s east and south.
All the anecdotal evidence of growth an economist would look for is there: booming retail services, the rush of small business openings, and traffic jams. A manager at a phone retailer talks about how the business is expanding to more cities. Less tangibly, you feel—from the way people walk, from their facial expressions—an energy waiting to be unleashed. If “animal spirits” mean anything, it does this, which is good news for Ukraine’s economy.
While no one forgets the terrible sacrifices that take place each day, and the constant threat from Russia, I expected a much bleaker atmosphere. I sure did come at a good time. It’s spring, the winter blackouts and the blackouts caused by 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. Many recent studies have predicted a decent growth rate. Dragon Capital, a Kiev-based investment group, expects growth of 3 percent in 2023 in a note to its clients. The Vienna Institute for International Economic Studies expects a smaller expansion of 1.6 percent. But any positive growth at all means we are in a much different and more stable position than when GDP fell by about 30 percent due to Russia’s all-out invasion last year.
In fact, the current quarterly growth rate is likely to be higher than these relatively optimistic annual rates would suggest. When I asked Olena Bilan, chief economist at Dragon, for details, she wrote: “I expect +19% yoy in Q2-23, +9% in Q3 and +2% in Q4, with the slowdown in Q4 attributable to to the normalization of the grain harvest, after a marked delay last year.”
Both forecasts are much better than the International Monetary Fund’s forecast of a further 3 per cent drop in GDP this year. Until recently, in fact, most predictions for the economy were stagnant (zero growth) at best. The National Bank of Ukraine is holding a monetary policy press conference today – after the free lunch is out, but you can check it out to see what it says about the economic outlook.
My impressionistic view of the economy, as we saw in Kiev, leads me to believe that the new positive forecast is correct. We can’t rely too much on anecdotes and observations. Of course, Kiev isn’t all Ukraine. But there is enough analysis and evidence to feel confident that Ukraine’s economy is in better shape than many outside observers believe.
We have little experience, and so we may not easily grasp what a double-digit drop in GDP means. So it’s important to note that in the case of Ukraine, the 30 percent decline in the past year largely reflects Ukraine’s loss of territory and population — about 15 percent of Ukrainians may have fled the country — and, of course, the physical devastation where the fighting takes place. But this is not the same downhill spiral everywhere in the country. Economist Hleb Veslinsky makes this point well. He recently appeared on my colleague Gideon Rachman’s podcast, which is well worth a listen.
The Center for Economic Strategy, which Veslinsky heads, has an excellent war economy tracker that clearly shows many signs of progress. Vacancies have returned to pre-invasion levels. And also there are many business confidence measures, which are balanced between expected expansion and contraction, which are steadily improving. The latest set of slides from NBU shows that consumer confidence is also improving: consumers’ expectations about how their personal economic situation will develop are now significantly more positive than they were before Russia’s all-out attack. And inflation, which the central bank managed to avoid with smart policy last year, is falling again.
On the other hand, there are obvious huge challenges. Russian attacks will continue to destroy until they are stopped. Aside from the devastation and forcing people to flee, Russia’s closure of important Ukrainian trade routes is a difficult constraint even for areas where economic activity can occur. I am told that the enhancement of transport capacity across the western land frontier cannot, in the foreseeable future, replace lost sea trade.
Then there are the finances. Ukraine’s balance of payments and government budget is completely dependent on foreign financing, as much as a third of GDP when everything is taken into account. We should note that this is not an anomaly. It is the way we should want an ally to run a wartime economy where massive domestic resources must be devoted to defence. The current stabilization and slight upward shift of the economy comes because the government now has predictable budget support from the EU and other partners (among other things, soldiers’ salaries and other military spending help support demand in the broader economy). This must continue until the war is won, and additional support must be accelerated to rebuild what has been destroyed.
The final big question is, how many Ukrainians who have had to flee will return, and when? Until now, few expect or even wish that many of their relatives and loved ones would return home until the military situation changed for the better.
After my visit to Kiev, I will have more observations about Ukraine to share over the coming weeks and months. For the time being, with the caveats you mentioned, I think it is our duty to take note of the good economic news, as it brings us some important and unacknowledged truths about Ukraine.
The first is the remarkable adaptability of Ukrainians, as well as in economic life. Behind the statistics of the return to modest growth are thousands of stories of rapidly restructuring value chains, production and delivery processes. It turns out that this is an unusual graceful economy. Several people I spoke to raved about Nova Poshta, a postal company that powers the online retail economy. “I can get a shipment from Kiev to Kharkiv in six hours,” one executive told me. The level of digitization should also leave many Western European countries (and the United States) envious. While this helps with the current painful situation, it also holds huge promise for the future.
Second, the significant drop in activity – it should be clear by now that “crash” is the wrong word – at least sets things up for the possibility of very strong growth. The deeper the economic downturn, the faster it will grow in the short term. And if the big reasons that stopped a third of activity last year turn around — more wins, the return of Ukrainians — double-digit growth is entirely possible, even probable.
Third, because much of economic dynamics is self-reinforcing, a lot hinges on whether you can shift from pessimistic to optimistic expectations. If the current growth dynamics can be maintained, it is likely to accelerate. More Ukrainians will find the risks of returning worth it. Higher tax revenues will give the government more room to maneuver. The realization that there is money to be made will start to attract the attention of foreign investors. I’m not saying this will happen, but it is a plausible scenario – and Ukraine’s allies are clearly doing what they can comprehend – if the war does not take a turn for the worse, and especially if the war does take a turn for the better.
Fourth and finally, this means that there are important economic arguments for more military support for Ukraine, and specifically greater air capabilities. If the free part of the country can be made safe against air attacks, then even with a slump on the front line, you might start to see more people go home – leading to the sort of utopian cycle you described. From the point of view of Ukraine’s partners, this would mitigate the need for budget aid. So, increasing military support more is not only morally correct, but also much cheaper.
Other readings
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In my article this week, I said that the EU will only be able to defend its strategic interests if it is willing to link economic integration with China to Beijing’s actions.
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Speaking of Beijing’s actions, the Australian Strategic Policy Institute has published a new report that shows how China builds influence operations through networks of fake social media profiles.
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Sarah O’Connor laments how bad Britain’s enforcement of labor laws is, the subject of a new Resolution Foundation report. The Economist made similar points recently. For me, I’m glad to see that car washes remain my favorite example of showing the state of the labor markets.
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European Union beekeepers are battling an influx of imported honey adulterated with sugar syrup. Don’t buy cheap honey, folks!
