Ukraine’s central bank predicts economy will grow almost 16% in Q2
Real GDP will grow by 2.0% this year after falling by 29.1% last year (Photo:NBU press center)
The decline in Ukraine’s real GDP slowed to 13.5% in Q1 2023, against 31.4% and 30.6% in Q3 and Q4 2022, respectively, the National Bank of Ukraine (NBU) said in its April 2023 Inflation Report.
However, according to the NBU, the economy will start recovering immediately, rising by 15.9% from Q2 2023, because of the low base of comparison with Q2 2022, when the decline was 36.9%.
The regulator expects economic growth to slow to 3.9% and 3.7% in Q3 and Q4 2023, respectively, and real GDP to grow by 2.0% in 2023, after falling 29.1% in 2022.
The new forecast is significantly better than the NBU’s January assessment, when annual growth was forecast by only 0.3%. In January, the central bank expected a decline of 19.5% in Q1, an increase of 11.7% in Q2, and of 1.5% and 8.2% in Q3 and Q4, respectively.
The regulator also improved its economic growth forecast for 2024, from 4.1% to 4.3%. As before, it expects economy growth by 6.4% in 2025.
The NBU stressed that among other things, the baseline scenario assumes that Ukraine will consistently meet its commitments under the new IMF-supported program and pursue coordinated monetary and fiscal policies, and that quasi-fiscal imbalances will be gradually eliminated, in particular those in the energy sector.
In addition, the baseline scenario assumes a significant decline in security risks from the start of 2024, which would contribute to the complete unblocking of seaports, a decrease in sovereign risk premiums, and the return of war refugees to Ukraine.
The NBU emphasized that the key risk to this forecast is that the war may last longer and be fiercer than anticipated. In this case, prolonged hostilities could slow the economic recovery and worsen exchange-rate and inflation expectations.
The war is also generating other risks, such as:
- the emergence of additional budget needs and substantial quasi-fiscal deficits, including in the energy sector;
- disruptions or a shutdown of the “grain corridor,” and aggravation of problems arising from the limitations imposed on imports of Ukrainian foodstuffs by some European countries;
- further damage inflicted by Russia on energy infrastructure, which could again cause substantial power shortages, restraining economic activity and exports and fueling demand for imported equipment and energy and, consequently, foreign currency.
Just as in Q1, the central bank estimates the risk of the war escalating and being prolonged at from 25% to 50%. It also raised the risk of the grain corridor being stopped to the same level.
Previously, the risk range was assessed at being within 15-25%.
With a probability of 15-25%, the NBU assumes increased migration and unbalancing of state finances (freezing of utility tariffs, reduction of international aid, deficit monetary financing), adding to them growing banking crisis in leading countries.
At the same time, the NBU now estimates the probability of the risk of energy deficit recovery due to infrastructure damage below 15% against 15-25% in the January report.
The regulator also mentions such a factor as the Marshall Plan in its report, which can significantly influence and improve the macro forecast. The NBU has increased its probability to 15-25% from less than 15% in Q1.
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