The pandemic year: a milder contraction on a weaker base

Ukraine's economy contracted by roughly four per cent in 2020. That is a serious recession and it was milder than 2009, when output fell by close to fifteen per cent, and than 2015, when it fell by around ten.

Given a health system with limited capacity and a fiscal position with limited room, the outcome surprised most forecasters. The explanation is structural.

Why the contraction was shallower

Four reasons.

The sectors that suffer most in a pandemic are the ones Ukraine has least of. Tourism, hospitality, aviation, entertainment and business travel are a smaller share of this economy than of most European ones. A country with a large tourism sector had a much worse 2020.

Agriculture is unaffected by lockdowns. Fieldwork is outdoors and low-density, and demand for grain and oilseed does not fall in a pandemic. A sector that is a substantial share of output and the largest share of exports simply continued.

IT services continued and grew, for the same reason they continued through everything else — the product crosses borders as data and the workforce was already partly remote.

And the shock in 2009 and 2015 came through export prices and the exchange rate, both of which behaved better in 2020. Steel and grain prices held up, and the currency, under the inflation-targeting regime, moved without collapsing.

What it cost

The costs were concentrated in specific places rather than spread across the economy.

Small services businesses in the cities — restaurants, gyms, hairdressers, small retail — took the direct hit, and support for them was limited relative to what EU states provided.

The informal sector, which is large, had almost no access to support because it has almost no relationship with the state.

Remittances fell during the first lockdown as labour migrants returned, then recovered faster than expected as workers went back.

And the health system's limitations showed in mortality rather than in economic output, which is the part of the accounting that does not appear in GDP.

What it revealed

Three observations that outlast the episode.

An economy weighted toward primary production and remote-deliverable services is unusually resilient to a demand shock that hits proximity-dependent sectors. That is not a design achievement — it is a consequence of underdevelopment in services — but it is a real property.

Fiscal capacity is the binding constraint on crisis response. Ukraine could not spend what European states spent, and the difference showed in which businesses survived.

And the state's ability to reach the informal economy is close to zero, which matters in every future crisis. A support programme that only reaches registered employers reaches perhaps half the workforce.

The comparison worth making

The useful reading is not that Ukraine handled 2020 well. It is that the shocks this economy is vulnerable to are specific and identifiable: export price collapses, currency crises driven by unhedged foreign borrowing, and disruption to export logistics.

A pandemic is not on that list. A route closure is, which is why the events of two years later were an order of magnitude worse.

Related in this archive

• Ease of doing business: what the rankings measure, and what they miss
• Why the hryvnia stopped moving: the mechanics of a managed float
• How the shock propagated: the war's economic effects beyond Ukraine
• Ukraine Annual Review 2020: a contraction that tested the 2015 repairs

On our side that year brought uncertainty more than decline: orders were not cancelled but postponed, and nobody knew when they would return. The contraction was shallow not because of resilience but because a large part of the economy already worked flexibly. That looks like good news and is not — the same flexibility is another name for low productivity.