Ukraine Market Report — Q4 2017
A second full year of growth, EU exports rising as certifications accumulated, and labour shortage emerging as the constraint that would define the following five years.
Overview
The year closed with a second consecutive year of growth. Exports to the EU rose as more Ukrainian producers completed certification.
Labour availability emerged as a widespread constraint across construction, transport, manufacturing and agriculture.
The labour constraint
This is the development of the year with the longest consequences, and it was structural rather than cyclical.
Three things converged. Long-running emigration accelerated after visa liberalisation made movement easier. Demographic decline meant the working-age population was shrinking independently of migration. And wage expectations rose because the Polish comparison had become direct and personal for a large number of people.
The result was that Ukrainian employers in labour-intensive sectors began competing on wages against a European floor while their productivity remained substantially below European levels.
An economy whose labour costs rise faster than its productivity loses competitiveness. The response available is automation, higher-value output, or accepting lower margins — and Ukrainian firms did all three in different proportions over the following years.
Macro position
Growth for the second year. Inflation above target. Currency stable. Reserves adequate. The IMF programme progressing slowly against unmet conditions.
Sectors
Agriculture — a strong year, increasingly mechanised partly in response to labour costs.
IT services — the fastest-growing sector, and the one absorbing the graduates other sectors needed.
Construction — recovering but constrained by skilled trades availability.
Food processing — EU access expanding facility by facility.
Metals — adapted to the loss of eastern inputs.
What the quarter settled
That the binding constraint on Ukrainian growth had changed. Between 2010 and 2015 it was capital and credit. From 2017 onward it was labour, and unlike the first constraint the second does not respond to policy on any short timescale.
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