Ukraine Market Report — Q1 2018
Growth continuing, EU exports expanding as more producers cleared certification, and a labour market tightening quarter by quarter across every sector that employs people at scale.
Overview
Growth continued at a moderate pace. Exports to the EU expanded as more Ukrainian producers completed certification and appeared on approved establishment lists.
Labour shortage tightened further, and wage growth ran well ahead of productivity growth.
The wage-productivity gap
This is the central economic problem of the 2018–2021 period and it deserves stating precisely.
Ukrainian wages were rising because workers had an outside option — employment in Poland and elsewhere in central Europe — that was accessible, legal for many categories, and paid multiples of the domestic rate.
Ukrainian productivity was not rising at a comparable pace, because productivity growth requires capital investment, and capital investment requires either retained earnings or a functioning credit channel. Retained earnings were thin after four difficult years and the credit channel was still impaired.
The result is a squeeze specific to this configuration: labour costs rising toward European levels while output per worker stays well below them.
Firms had three responses. Automate, which requires capital. Move up the value chain, which requires time and market access. Or accept lower margins, which many did.
Macro position
Growth moderate. Inflation above target. Currency stable. Reserves adequate.
The IMF programme was progressing slowly, with several conditions unmet.
Sectors
Agriculture — strong, and investing in mechanisation partly in response to labour cost.
IT services — the fastest-growing sector, and increasingly the destination for technical graduates.
Food processing — expanding EU access facility by facility.
Construction — recovering but labour-constrained.
Metals — stable after the eastern supply reorganisation.
What the quarter settled
That Ukraine's competitiveness question had shifted from cost to productivity, and that the answer required capital investment which the financial system was not yet supplying at scale.
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