Ukraine’s Household Income Bounced Back, but 2012 Remains Uncertain

The income and spending of Ukrainian households declined sharply in 2009 as the country was hit by the global economic crisis of 2008-2009. 2011 brought signs of recovery, including higher foreign investment and export earnings and a lower unemployment rate, with incomes rising accordingly. Despite higher consumer spending boosted by rising incomes, Ukrainian households remain among the poorest in Europe, with over a third of household expenditure devoted to essential items.

Household Annual Disposable Income and Consumer Expenditure in Ukraine: 2006-2011

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Source: Euromonitor International from national statistics/Eurostat/UN/OECD

Note: All data are in constant 2011 prices

  • The healthy growth in disposable income and consumer expenditure was slowed down and reversed by the negative effect of the 2008-2009 global economic crisis on Ukraine’s export earnings, FDI (foreign direct investment) inflows, employment and remittances. In 2010, annual disposable income and consumer expenditure per household return to growth at 7.1% and 8.1%, respectively, in real terms. Growth rates recovered to pre-crisis levels in 2011, with consumer expenditure per household increasing 16.0% in real terms year-on-year, and household disposable incomes growing 14.9%;
  • GDP growth recovered to 5.2% in real terms in 2011, as exports increased by 33.0% and FDI inflows grew by 3.2% in real terms. The recovery boosted household incomes by improving the situation on the labour market, with the unemployment rate declining to 7.9% of the economically active population in 2011 having peaked at 8.8% in 2009.

Implications

  • The increase in consumer expenditure in 2011 was mainly fuelled by the growth in disposable incomes, but a persistently high inflation rate (at 8.0% in 2011) further encouraged Ukrainian consumers to spend. The savings ratio has been on the decline since 2009, falling to 10.7% of disposable income (from 12.2% in 2009), as consumers are discouraged from saving a high share of their incomes due to the high inflation and the perceived instability in the financial sector. Because of lack of savings, consumers are less likely to invest in larger and pricier consumer goods, such as cars and household appliances;
  • Throughout the 2006-2011 period, Ukrainian households dedicated over a third of their expenditure to food and non-alcoholic beverages, with this category growing to 38.2% of total household spending in 2011. With a further 12.7% spent on housing in the same year, most Ukrainian households have been unable to dedicate anything but the absolute minimum to non-essential goods and services. Thus, the leisure and recreation category attracted only 4.1% of household spending in 2011, compared to 8.8% on average in European Union (EU) countries, and 6.1% for households in the Eastern European region;

Consumer Expenditure by Category in Ukraine: 2011

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Source: Euromonitor International from national statistics/Eurostat/UN/OECD

  • However, Ukrainian households have not been equally affected by the problems in the economy, and a small number of households, predominantly concentrated in the capital Kyiv and sea port Sevastopol, have income levels and consumption preferences more aligned with those of well-off families in Western Europe. The share of households earning US$15,000 and more per year has increased from 2.6% of total in 2006 to 5.1% of total in 2011. At the same time, income inequality in the country has widened, with the Gini coefficient (with 0 representing perfect income equality and 10 – perfect inequality) growing from 3.3 in 2000 to 3.5 in 2012. The rising number of richer households opens up new possibilities in the Ukrainian consumer market, including luxury goods and international holidays.

Prospects

  • Ukraine’s economy might face more turbulence in the remainder of 2012, as fears grow that the Central Bank may be unable to sustain the hryvnia’s peg to the US dollar, fixed at UAH 8.0 per US$1.0 in 2008. Although this may lead to the introduction of a more flexible exchange rate arrangement including the euro which would be beneficial for long-term stability and foreign trade with EU countries, business investment and consumer confidence are likely to be negatively affected in the short term;
  • Consumer prices and the prospects of the economy may be further affected by the intentions Ukraine announced in September 2012 to increase tariffs on hundreds of imported goods. This effort to protect domestic industries is likely to push up the prices of imports, reduce the disposable income and purchasing power of consumers, and even fuel smuggling, as many consumers are now used to access to a wide range of foreign goods and would be unwilling to give them up. The country’s annual GDP growth is forecast to slow to 1.8% and 2.5% in real terms in 2012 and 2013, respectively.