Economic forecasts show Ukraine’s economic resilience amid Russian invasion

The Ukrainian Economic Ministry report, published late last month, offers a comprehensive review of Ukraine’s socio-economic development, explains the challenges the country is facing, and offers projections for the near future.

Meanwhile, The European Commission report offers similar insights, including forecasts on economic growth and inflation among other things.

Economic impact of the conflict

The Ukrainian Government report unsurprisingly concludes that Russia’s invasion caused substantial damage to Ukraine’s economy.

Direct losses from Russia’s attacks are estimated at nearly $152 billion, with residential properties, transport infrastructure, energy, agriculture and industrial facilities all hard hit.

The eventual reconstruction and recovery, at the time of the report’s publication, is stated as approximately $486 billion.

Macroeconomic performance

Despite these challenges, the report from Ukraine’s Ministry of Economy concludes that Ukraine has demonstrated remarkable resilience, with its economy gradually adapting to the wartime conditions.

In 2023, Ukraine’s GDP growth rebounded to 5.3%, a significant improvement from the 28.8% contraction in 2022.

According to the report, this recovery was driven by several factors, including the professional performance of the Armed Forces of Ukraine (AFU), which improved the security situation and allowed for the resumption of maritime transport. Additionally, robust international financial support helped offset the lost demand caused by migration and logistical disruptions.

The European Commission report, however, warns that the Ukrainian economy will likely contract this year:

“Real GDP growth is projected to decelerate significantly in 2024. The war will continue to dampen sentiment and hinder productive capacities, including in the energy sector, where early estimates suggest that between 30-40% of energy generating capacity was destroyed in early 2024. The ongoing conscription of individuals, coupled with the sustained displacement of persons fleeing the war both internally and abroad, will likely continue to generate labour shortages and have repercussions for economic output.”

International support

Another key finding in the Ukrainian Government report was that international financial aid played a crucial role in stabilising the country’s economy.

This aid was instrumental in financing the budget deficit, which rose to 20.4% of GDP, primarily due to increased defense expenditure. The national debt stood at 79.4% of GDP by the end of 2023.

Businesses show ability to adapt to wartime conditions

Ukraine’s Economic Ministry also states that the country’s business sector has shown significant resilience, with 91% of enterprises resuming operations since the start of the conflict.

Moreover, the report claims deregulatory measures and financial support programs like “Affordable Loans 5-7-9%” and the “eJob” grant initiative, have helped to bring about a recovery via the resumption of production.

This, it is said, has been particularly true in critical infrastructure sectors, while the measures have also been credited with fostering entrepreneurial activity.

Ukraine’s agricultural sector also contributed to a recovery last year, with yields higher than in 2022. Increased production capacity in the mining industry was another contributor.

Logistics and trade challenges

Despite these positive trends, the Ukrainian Government report did not hide the fact that Ukraine’s export sector continues to face significant challenges. This is reflected in the fact that exports of goods are forecast to fall slightly this year.

The temporary bans on agricultural exports imposed by the European Commission and individual countries, as well as non-tariff restrictions and border blockades, have adversely affected export performance, say the authors of the report. For example, tariffs for passenger transportation by rail increased by 19.8% in some periods.

Nonetheless, it is stated that the establishment of alternative logistics routes, including the Ukrainian maritime corridor, has helped mitigate some of these impacts.

This also noted in the European Commission’s Spring Economic Forecast, which states:

“On the external side, the revival of the Black Sea transport route will likely bolster exports, resulting in a gradual improvement in the negative contribution of net exports to GDP growth. However, the trade balance should remain in negative territory, given the large import needs for recovery, reconstruction and defence.”

Inflation

Ukraine’s Ministry of Economics writes that inflation has shown signs of stabilisation, with consumer inflation rates decreasing to 3.2% in March 2024 – the lowest in over 3 years.

Moreover, it said that the transition from a fixed to a managed flexible exchange rate regime has contributed to maintaining the relative stability of the Ukrainian hryvnia, which averaged 36.6 UAH/USD in 2023.

However, in its Spring Economic Forecast, the European Commission warns that higher inflation could be on the way.

“Inflation has recorded a large and steady decline since 2023, reaching 3.2% in March 2024, down from 21.3% in March 2023. This large drop was mainly driven by declining food prices, which were pushed down by an oversupply of agricultural products in the domestic market in view of the strong harvest and disruptions to the export routes. As this factor gradually fades, inflation is expected to increase, also driven by disruptions in energy supply, increasing labour costs, and a recovery in domestic demand. Consequently, after decreasing to 5.5% in 2024, inflation is expected to pick up to 7.8% in 2025,” states The Commission’s report.

Future projections and scenarios

The Consensus Forecast outlines two primary scenarios for Ukraine’s economic outlook: one assuming the end of the conflict in 2024 and another considering a prolonged war. Under the optimistic scenario, the real GDP growth is projected at 3.6% for 2024 and 5% for 2025.

Conversely, the more conservative scenario forecasts a 3.5% GDP growth in 2025, with a wide variance in predictions ranging from a 1.3% decline to a 6% increase.

As for the aforementioned European Commission report, its forecast is as follows:

“Under the assumption that conditions for a gradual increase in early reconstruction efforts will be in place from early 2025, growth is forecast to pick up in 2025 following a boost in confidence and large reconstruction investments. As a result, after decelerating to a projected 2.9% in 2024, real GDP growth is expected to gather pace and reach 5.9% in 2025.”

The Commission nonetheless warns that this forecast is of course “subject to particularly high uncertainty,” with their being “risks largely tilted to the downside”.

“An escalation of the conflict could, apart from causing additional human suffering, add to the already high input costs and lead to further loss of production capacity. An increase in the number of people fleeing the war could also exacerbate labour market pressures and weigh on domestic demand,” adds the report.

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