Business Activity Recovery Index Deteriorates Again After Two Months of Growth – IER Survey

• The Business Activity Recovery Index deteriorated to -0.16 in August.
• The share of businesses operating at near-full or full capacity fell from 64% to 61%.
• Among businesses able to assess their prospects two years ahead, the share of optimists declined, while the share of pessimists increased.
• The average duration of the backlog of new orders shortened from 2.9 to 2.6 months.
• The main expectation among businesses is the “end of the war”, which is important for 85% of businesses.

The Business Activity Recovery Index (BARI) reversed its two-month trend of gradual improvement in August, falling to -0.16 from -0.11 in July.

The share of businesses that considered their business activity worse than a year earlier increased from 18.5% to 24.3%. At the same time, the share of businesses that assessed their activity as better changed only slightly, from 7.7% in July to 8.3%, while the share reporting no change fell from 73.8% to 67.4%.

This is according to the results of the 52nd New Monthly Enterprises Survey conducted by IER in August among 465 businesses of all sizes.

“The BARI declined more significantly among micro businesses. At the same time, it also deteriorated among small, medium-sized and large businesses, although to a lesser extent among large businesses. The BARI is now below zero for all business-size groups, indicating that the share of businesses reporting a deterioration in the situation over the past year exceeds the share reporting an improvement,” said Oksana Kuziakiv, Executive Director of IER.

Capacity utilisation in August remained broadly unchanged compared with the pre-war level. The share of businesses operating at near-full capacity fell from 58% to 55%, while the share operating at 50–74% capacity increased from 21% to 24%.

The share of businesses operating at 100% capacity remained unchanged at 6%. The share of businesses that are not operating at all also remained at 3% for the third consecutive month.

Business uncertainty across different time horizons either remained broadly unchanged or increased slightly. Over the next six months, uncertainty decreased regarding the overall economic environment, while it remained broadly unchanged regarding the financial and economic situation at the business level. At the same time, assessments and expectations for this period deteriorated.

Over the longer term, uncertainty remained almost unchanged: in August, 40% of businesses were unable to predict how their business activity would develop over the next two years, compared with 40.5% in July.

“The Index of Expected Changes in Business Activity over the next two years fell more than threefold, from 0.1 to 0.03, although it remains positive. The share of businesses planning to expand their operations fell from 11.6% to 8%, while the share planning to scale them back increased from 1.5% to 5.3%. The share of businesses planning no changes remained virtually unchanged – 86.9% in July and 86.7% in August. Businesses are pursuing a conservative strategy of maintaining their current operations,” said Oksana Kuziakiv.

In manufacturing, performance deteriorated in August after two months of improvement. The share of businesses that increased production volumes changed little – 27.6% compared with 28.7% in July, while the share that reduced production increased from 12.3% to 15.6%. Expectations for the next 3–4 months also deteriorated.

Exports also showed a slight deterioration. The share of businesses reporting an increase in exports changed little – 30.3% compared with 29.5% in July, while the share reporting a decline increased from 14.3% to 19.7%. Over the next three months, 26.4% of businesses expect exports to increase, compared with 27.8% in July, while the share expecting a decline increased from 2.5% to 7.4%.

The average duration of the backlog of new orders shortened from 2.9 to 2.6 months.

“This indicator declined due to an increase in the share of businesses with a one- to two-month order backlog, from 31% to 41%, while the share of companies with orders covering three to five months fell from 25% to 17%. The share of businesses with orders for a year or more remained at just 4%. This means that businesses are facing difficulties securing orders,” said Oksana Kuziakiv.

Businesses in the chemical industry have the longest order backlog, at 3.2 months. They are followed by companies in wood processing (3.1 months) and metal and metal products manufacturing (3.1 months). The shortest backlog is reported by the printing industry, at 1.8 months.

Business expectations regarding prices deteriorated significantly. Some 54.5% of businesses expect prices for raw materials to increase over the next three months, compared with 44.7% in July. For finished products, the share of businesses expecting prices to rise increased from 43% to 52.8%.

IER also asked businesses about their main expectations. The “end of the war” remained the top expectation, although the share of respondents citing it declined somewhat from 89% in January.

“The most anticipated development is the end of the war, at 85%. This is consistent with all the other data. The war affects all aspects of our lives and, in fact, business activity as well. Apart from the ‘end of the war’, there is no other expected development that stands out significantly from the rest,” said Oksana Kuziakiv.

“Employee reservations from mobilisation” moved from third to second place among the measures businesses would like to see, despite only a slight change in the percentage, from 27% to 28%. August was marked by an active process of reconfirming the critical status of businesses.

The expectation of “lower taxes” moved up one place to third, although its share declined from 25% to 24%. This was because the expectation of “protection and restoration of Ukraine’s energy system” fell sharply, from second to seventh place, declining from 35% to 19%.

It is also worth noting that “reducing corruption” ranked fourth, at 22%, while “financial assistance to businesses affected or damaged by the war” ranked fifth, at 20%.

“Simplifying regulatory requirements for businesses”, that is, deregulation, remained virtually unchanged at 15%. At the same time, the share of respondents expecting that “insurance against war-related risks for businesses” would improve conditions for doing business increased by 6 percentage points,” said Oksana Kuziakiv.

Up to 500 Ukrainian industrial businesses participate in IER’s monthly New Monthly Enterprises Survey (NRES), covering 21 of Ukraine’s 27 regions. The survey has been conducted monthly since May 2022.

A video presentation of the August survey results is available here.