The year began with good news: inflation in 2018 for the first time in five years decreased to an unambiguous level – 9,8%. The Ministry of Finance said that this year, the average monthly salary of Ukrainians will increase to 10 thousand hryvnias, and the Minister of Social Policy said that the income of the population is growing faster than utility expenses. However, despite the irresistible optimism of government officials and financiers, ordinary citizens did not feel the rapid growth of welfare. Why the statistics once again didn’t fit the reality?
Now, the real incomes of Ukrainians are still only 82% of 2013 level, and real cash incomes of citizens, according to the NBU, increased by only 9.8%. Of course, wages increase, minimum wages per year increased by 13%. According to the results of eleven months of last year, the growth of the average nominal wage amounted to 22.5%, compared with November 2017. But nominal growth does not reflect the real income growth, because it does not take inflation into account. And if we compare the growth dynamics of the average salary not with the last year, but with the last month, that is, October, then it turns out that there was no growth at all – the average salary decreased from 9218 UAH to 9161 UAH.
With a nominal increase in earnings of Ukrainians by 22.5%, the real growth compared with last year was much smaller – 11.4%, and comparing with the previous month – decreased by 2%.
Actual but very insignificant increase in wages has taken place in the sectors of public administration, health care and entertainment. In other areas, raising the salary during the last months of the year was stopped. And in such spheres as education, agriculture, transport, postal services and finance, salaries were on the contrary cut. The reason is, first of all, in the exhaustion of resources of the real sector spent to raise the fees. If the economy grows very slowly or does not grow at all, then there is no additional money for labor expense in business, and, given the trends, in the near future, there won’t be.
Pre-election stagnation
It is expected that real GDP growth will drop to 2.5% this year due to the tight monetary and fiscal policies of the state caused both by peak debt and election period, which always adds uncertainty. External factors are also not in our favor – the growth rates of the economies of the countries-trading partners of Ukraine are slowing down, which can negatively affect our export achievements. Consumption of the domestic market will remain the main stimulus of economic growth this year, that is, the real increase in GDP will depend on the number of goods that Ukrainians will buy. So, making a long story short, GDP growth depends on the growth of the incomes.
Ukrainian business, having overcome the crisis, planned to increase profits and looked forward with restrained optimism. In general, quite reasonable growth is the same, as it was before, most industries in the three quarters of the last year recorded an increase of 2-3%. However, there is a noticeable decrease in consumer goods manufacturing (-3%) and food (-2%) industries and, due to the lower yields, in butter-fat production (-10%). But another trend causes concern, since in the third quarter of 2017, after two years of growth, the profitability of companies began to decline.
On the one hand, this was influenced by the growth of competition in most industries, and on the other hand, by the growth of labor costs. There is another one trend that causes concern – the growth rate of incomes of enterprises is much smaller than the growth rate of expenses for paid salaries. Of course, raising the minimum wage plays a crucial role here, but the impact of labor migration from Ukraine every year increases this tendency. The number of manpower in certain industries is getting smaller, employers are forced to offer higher wages to not only attract new employees but also keep those already working. Most of all, it was seen in the transport sector, consumer goods manufacturing, mechanical engineering, agriculture and construction. It is clear that the resources of the companies they are willing and able to spend on wages are limited, and the high-interest rate of the NBU, which made the credit money in the country very expensive (the average interest rate is approximately 17%), it requires that companies also increase interest expense on loans. Therefore, in the near future, no rapid growth in household incomes is expected, despite optimistic expectations of the government. Growth in household incomes will be restrained and the welfare of families will increase only in case of restrained inflation. That is, household spending on basic needs will grow slower than the total household income.
Inflation risks
At the moment, the NBU assures everyone that it has taken control over inflation. Due to the results of the year, inflation in the consumer market for the whole year (December 2018 to December 2017) was 9.8%, core inflation – 8.7%. This is a good result, as the inflation for the first time in recent years is marked by an unambiguous level. But it is too early to talk about a sweeping victory.
NBU has a long way to go until it reaches 5% and probably even in 2019, we will not achieve this. But this goal will require the NBU to continue a tight monetary policy that restricts business access to money.
According to the latest survey “Business Expectations of Ukrainian Enterprises”, the number of companies expecting an increase in production level this year has decreased by 18.2% compared to the previous quarter. In addition, the vast majority of surveyed entrepreneurs believe that inflation will increase, ranging from 9.5 to 12.5%. The main factors that, in the belief of business, will affect the growth of inflation are the hryvnia exchange rate, the growth of production costs and the growth of incomes. In particular, 78.6% of surveyed businessmen believe that the exchange rate in the coming year will be higher than 29 UAH / USD.
The main deterrents for the development are high prices for energy and raw materials, political instability and the lack of skilled workers. It is interesting, that, more than 70% of interviewed entrepreneurs at the same time plan to raise prices for their own products, relying on a stable demand of the population.
During 2018, the financial situation of Ukrainians really improved, but in order for people to feel this, wage growth should exceed inflation, so that Ukrainians not only spend but also save. The results of last year show that we have not yet reached this trend. Despite the growth in earnings, the growth of deposits of individuals in banks is slower than the growth of consumer lending. That is, Ukrainians still do not have resources for savings.
According to the NBU, the correlation between the financial savings of citizens and their actual income increased to 4.2% of the income. This is insignificant growth if we recall that until the last crisis, Ukrainians saved more than 10% of their earnings. According to GfK Ukraine, only 14% of our fellow citizens are able to save money without restricting their own consumption. At the same time, they are not in a hurry to bring their money to banks, because only 4% of respondents have fixed deposits, or plan to have them. This data is also confirmed by NBU – comparing with January 2017, the share of fixed deposits in their total volume decreased to 63%. Ukrainians prefer to keep the rest of their wages or social transfers in banks, but they are not ready for a long-term deposit yet. According to the State Statistics Service, only 30% of households’ expenses for essential needs do not exceed 60% of the total income, the rest – spend earned money almost immediately.
This explains another trend – the growth of lending. Now Ukrainians come to banks to get loans if there is not enough money more often. During the year, consumer credits in hryvnia grew by almost 35% from the fourth quarter of 2017. Most loans taken by Ukrainians, not secured by mortgages, were issued for a short period (up to one year) and at high-interest rates, are spent on current needs. Only 7% of people took loans to buy cars and less than 2% – for the purchase of housing or major repairs. This is the academic formula – banks will not be able to issue long and cheap loans until they receive “long and cheap” deposits.
In order to get positive trends – income growth and lower inflation – the government will have to solve a rather difficult task – to provide business access to additional funds under tight monetary policy. There are several ways, in particular, the NBU has already hinted that it can reduce the discount rate in the near future, but this will not be a sharp decrease, and with a real rate of 18%, it will not be able to immediately provide business access to cheap loans. Another way – the search for foreign investors – is also quite complicated. Despite some success in other areas, nobody succeeded in attracting investments, systematic improvement of Ukraine’s positions in various ratings, does not affect the increase of real interest of Western business in Ukraine. In a year of dual elections, the situation with the attraction of investments is expected to become even more complicated. So, most likely, optimistic trends will not be saved this year. In some companies after running out of the resources, in case of not finding additional funds, the salaries for employees will be hardly raised, but the prices for their own products will be raised more willingly. Inflation will continue to outpace wage growth, supporting consumption, but without stimulating savings. And officials, in their turn, will continue to manipulate statistics, operating at nominal rates and stating that Ukrainians are getting rich.
Text by Valentyna Yushchenko
