Ukraine’s economy has proven to be resilient and is beginning to recover. But the weight of the war is still weighing heavily on the country and Russia’s intensified bombardment of recent months has already caused some analyststo lower their GDP forecast for this year.

“The resilience of Ukraine’s economy to unprecedented external shocks remains beyond any doubt. The economy continues to grow in 2024 at a reasonable pace and massive destruction of the country’s energy infrastructure will only slow, but not disrupt, the recovery,” Vitaliy Vavryshchuk, an economist with the Ukrainian investment bank ICU said in a note.

Unexpectedly, Ukraine saw a significant slowdown in inflation in the first quarter of 2024, with the rate dropping to 3.2% in March, signalling potential for future interest rate reductions amid a stable foreign exchange market.

The National Bank of Ukraine (NBU) now anticipates lowering its key policy rate to 11.5% by year-end, a 3 percentage point cut from current levels, which could also lead to a decrease in government bond yields.

"The biggest positive surprise of 1Q24 was a sharp slowdown of inflation," Vavryshchuk and his research team said adding falling inflation has been helped by low consumer price inflation and stable currency rates. This environment has opened up prospects for reduced borrowing costs, with predictions suggesting that the cost of one-year debt could fall below 14% by the end of 2024.

Another key development bolstering Ukraine's economic stability is the controlled depreciation of the hryvnia, which is crucial for addressing the country’s surging trade imbalances. Following recent adjustments in monetary policy, projections for the end-2024 exchange rate have been revised to between UAH41.5 and UAH42.5 to the dollar, down from ICU’s previous estimate of UAH40.7.

Financial aid from abroad continues to play a critical role in Ukraine's economic strategy. "With the US aid package voted, Ukraine should secure enough external financing to ensure that NBU reserves increase in 2024," said ICU.

Despite the hiatus in aid between January and April, the government managed to muddle through by postponing some non-critical expenditures. A notable rise in tax collections has also taken off some of the pressure, although risks remain that budget financing needs might exceed the specified UAH1.6 trillion. If this scenario unfolds, the government is prepared to source additional funds from the local market to bridge any gaps.

Ukraine's economic recovery has been bolstered by a rebound in exports, with real GDP growing by 5.3% year-on-year in 2023 after a significant 28.8% decline in 2022. This recovery was primarily driven by an expansion of the government’s role in the economy, with increased spending on defence and security.

Government consumption has surged to nearly 42% of nominal GDP in 2023, up from the pre-war 18% in 2021, while investments in military equipment also saw a 53% increase.

Despite these gains, international trade remains a significant challenge as Ukraine’s war-torn economy has seen production and exports fall while imports have risen: real exports declining by 5.4% due to logistical issues, while imports rose by 8.5% to meet domestic demand.

The recovery of private household consumption also contributed positively to GDP growth, providing a solid base for continued economic improvement.

“Gradual economic recovery is set to continue through 2024, but at a slower pace compared with 2023. This year, economic growth is supported by a further rise in household demand thanks to an increase in real wages against the backdrop of very low inflation,” Vavryshchuk said.

The 13% increase in the minimum wage and recently approved additional payouts to military personnel will boost incomes of public sector employees. In the private sector, growth in salaries will also be sustained due to high competition for qualified labor. The contribution of government consumption to GDP growth is likely to decrease as gradual fiscal consolidation implies a decline in expenditures relative to GDP. Exports will also become a significant driver of GDP growth thanks to the smooth operation of the Black Sea cargo shipping corridor that now allows deliveries of a wide range of commodities abroad, including agro produce, steel, and iron ore.

“All in, we believe the economy is in a position to have another year of decent growth. Two key near-term restraining challenges are volatile business confidence and massive destruction of Ukraine’s energy infrastructure that russia restarted recently,” Vavryshchuk said.  

Business and consumer sentiment improved markedly in recent months after they plummeted in the winter on a growing realization that the chances of a near-term end to the war are negligible.

The NBU Business Activity Index returned to positive expectations territory in March, but it remains extremely volatile.

“Of course, destruction of electricity generating and distribution facilities implies that energy-intensive industrial companies may face disruption of electricity supply. While the economy demonstrated its resilience to blackouts in 2022, this new wave of disruption will definitely affect the pace of economic recovery. Given the new risk, we downgrade our projection for 2024 GDP growth to 4.1% from a previous 5.0%,” Vavryshchuk concluded.

 

Key macroeconomic data and projections
	2023	2024F
Real GDP, YoY, %	5.3	4.1
Nominal GDP, US$bn	179	190
Inflation, YoY, %, e.o.p.	5.1	6.4
Key policy rate, %, e.o.p.	15	11.5
UAH/USD, e.o.p.	38	42.3
C/A balance, % of GDP	-5.2	-7.8
NBU reserves, US$bn	41	45
Budget gap, % of GDP*	-27	-22
Public debt, % of GDP	84	92
* budget balance before official grants to government e: NBU, UkrStat, ICU

 

Real value added by sectors, 2023 vs 2021
	Share in GDP*	Value added (2021 = 100%)
Government, incl defence	25.3%	146%
Trade	14.4%	72%
Manufacturing	9.4%	66%
Agriculture	8.5%	80%
Real estate	5.6%	68%
Electricity, other utilities	5.4%	66%
Transportation	5.0%	63%
Extraction	4.6%	66%
Communication	4.5%	84%
Education	4.0%	88%
Healthcare	3.0%	90%
Financial activities	2.7%	81%
Other	7.6%	na
GDP	100.0%	75%
Source: UkrStat, ICU. * share in 2023 nominal GDP, excluding taxes and subsidies.

 

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