The global economy entered 2020 in high uncertainty, the key factor of which was the escalation of the trade war between the USA and China in 2019. The natural consequence of this confrontation was the slowdown of the Chinese economy in 2019 to the lowest level in 27 years, a severe contraction in global trade and higher risks of a new global economic crisis. Manipulations of the yuan have caused volatility in global financial markets and heightened fears that the tariff war could turn into a currency war.
The easing of tensions in international trade and the easing of global monetary conditions (which began in 2019) prompted IMF Managing Director Kristalina Georgieva at the end of January 2020 to declare improved prospects for the global economy.
But such optimism was very short-lived. The spread of COVID-19 around the world (WHO announced a pandemic on March 11), and the sharp collapse in oil prices were the shock that triggered the global economic crisis. The deepest decline in economic activity was in the second quarter of 2020, which was due to the introduction of strict quarantine measures by most countries.
In June, the IMF lowered its projection of global growth in 2020 from -3% to -4.9%, and growth in 2021 – from 5.8% to 5.4%. For Ukraine, the June forecast of the IMF predicted a decline in GDP in 2020 by 8.2% and growth in 2021 by only 1.1%. It is this pessimistic scenario that was taken into account in the current program of cooperation between Ukraine and the IMF, which was approved in early June.
However, already in the third quarter, the global economy began to recover. In October, the IMF projected global growth at -4.4 % in 2020 and at 5.2% in 2021. For Ukraine, the October projection of the IMF, despite a significant improvement compared to June, was rather pessimistic: a reduction in GDP in 2020 by 7.2% and its growth in 2021 by 3% (reaching a rate of 4% only in 2025). As of October the NBU forecast a 6% reduction in GDP in 2020 with a partial recovery of 4.2% in 2021.
The reality turned out to be somewhat more optimistic: in the updated World Economic Outlook in early 2021, the global growth contraction for 2020 is estimated at -3.5%, and 5.5% in 2021. For European developing countries, the corresponding figures are -2.8% and 4%.
The current macroeconomic forecast of the NBU (published in the January Inflation Report) implies a reduction in Ukraine’s real GDP in 2020 by 4.4% (preliminary forecast was 6%) and growth in 2021 by 4.2%. The key factor in improving GDP dynamics in the second half of 2020 was the favorable external conditions for Ukrainian exporters, caused by the faster-than-expected recovery of the world economy.
The IMF’s position in this context is quite clear: the world economy has managed to enter the trajectory of recovery thanks to large-scale budget support by governments to their economies (about USD 14 trillion) and unprecedented monetary policy measures of central banks. All this, according to experts of the Fund, prevented the recurrence of the financial crisis of 2008-2009.
In Ukraine, the planned state budget deficit in 2020 grew to 7.5% of GDP (compared to 2% in 2019), but the actual figure was about 5.3% of GDP. According to the Budget Law for 2021 a deficit is projected at 5.5% of GDP, which is fully in line with the IMF guidelines on the inexpediency of a sharp reduction in government spending.
A much more controversial issue is how effective and adequate the NBU’s monetary policy was. The National Bank convinces the society that it has done everything in its power to support the economy during the crisis. Is this true?
The analytical review will help to form a comprehensive picture of the monetary stance, and to give an independent assessment of the effectiveness of the NBU’s monetary policy and its compliance with the challenges facing the Ukrainian economy in the global crisis.