The start of the economic recession in Europe impacted the Ukrainian economy as the dwindled demand worldwide caused a decline in production volumes in the mechanical engineering and metallurgy sectors, according to KW.

GDP growth in Q1 2012 slowed to 1.8% per annum (-0.3% quarter on quarter). Now the economy is stirred only with lively consumer demand, nourished with insignificant growth of real incomes. However, such potential will not last long, experts surveyed by KW this week believe.

“Heavy industry, which is the core of the Ukrainian economy, is suffering from a decrease in foreign demand. In the first quarter industrial production volumes increased by a mere 0.9% at year on year rate,” analyst at Erstebank Marian Zablotskiy told the publication.

The aggravated economic crisis in Europe may cause a stalemate in Ukraine. The official forecast of the Ukrainian government assumes a deceleration the GDP growth rate from 5.2% in 2011 to 3.9% in 2012. However, economists believe such a forecast is impossible even in the current situation, which is by no means critical. For example, the IMF revised its 2012 forecast of GDP growth in Ukraine from 3% to 4.8%. Fitch Ratings lowered its economic benchmark for Ukraine in 2012 from 4% to 1.6%. Analysts at Erstebank believe this year the Ukrainian economy will grow only 1%.

“Definitely, the recession in the domestic market played a key role in 2009. But the main factor is that the government underestimated the severity of the situation and was totally unprepared for its escalation,” says Director of Economic Programs at the Razumkov Center Vasyl Yurchyshyn.

In this context, the situation is not all that different today. Instead of conducting reforms to reduce the dependence of Ukraine’s economy on the export of raw materials, the government decided to put greater emphasis on populism by exaggerating its social policy. UAH 18.2 bn is envisaged in the national budget to fulfill the president’s social initiatives. For comparison, this year the government allocated UAH 1.684 bn for financing capital expenses.

Instead of introduction of programs for the substitution of import and seeking new target markets, the government began increasing pressure on businesses, which are currently going through rough times and are being forced to recede into the grey economy. Economists warn: in the event of any added external shock, the Ukrainian economy that has been worn out during the crisis years will not be able to withstand the blow and will experience a chronic recession, the article concludes.