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Ukrainian Economy to Grow at a Steady Pace of about 4% per Year, Inflation to Begin to Slow in late 2021 – Inflation Report

Ukrainian Economy to Grow at a Steady Pace of about 4% per Year, Inflation to Begin to Slow in late 2021 – Inflation Report

Consumer inflation will hit 9.6% in 2021, but will return to its 5% target in H2 2022. In 2021, the economy will grow by 3.8%. For details, see the NBU’s quarterly Inflation Report dated July 2021.

Inflation will start to decelerate in late 2021 and will return to its 5% target in 2022. As before, the NBU expects that inflation will peak in the autumn of the current year, propelled by high global prices, the ongoing recovery of domestic demand and the low comparison base. After that, inflation will start to decrease. Inflation will hit 9.6% in late 2021, but will return to its 5% target in H2 2022, on the back of a tighter monetary policy, bumper harvests, the correction in global raw material prices, and the waning effect of last year’s low comparison base.

The economy will recover due to strong domestic and external demand. In 2021, Ukraine’s GDP will rise by 3.8%, driven mainly but private consumption, which will increase by 8%. Coupled with favorable terms of external trade, this factor will offset the losses the Ukrainian economy sustained because of the tighter quarantine imposed in winter and spring and some other temporary factors. The services and passenger transportation sectors, which were impacted the most by the quarantine, will recover fast thanks to vaccinations becoming widespread. Economic activity will rebound also thanks to robust external demand. Favorable terms of trade will help improve the financial stance of exporters and revive investment activity. In 2022-2023, the Ukrainian economy will grow by around 4% every year. Growth will be fueled not only by high private consumption, but also by robust demand for Ukrainian exports and a rebound in companies’ investment activity due to their better financial performance and ramped-up lending.

The current account will move back into small deficit in 2021 (0.4% of GDP). The deficit will widen significantly in the years ahead. This year, the return to this deficit will be driven by an increase in domestic demand, the resumption of foreign tourism, and a rise in the repatriation of dividends. However, favorable terms of trade and record grain yields will restrain the widening deficit. In 2022–2023, the current account deficit will widen, in part due to the downward adjustment of export prices, a further recovery in consumer and investment demand, and a reduction of revenues from gas transit.

Labor market conditions will continue to improve, driven primarily by economic recovery. Unemployment will, on average, fall to 9.1% in 2021, and will approach its natural level (8.5%) in 2022. Rising social standards and further economic recovery will support higher household incomes. Nominal wages will increase by 18.8% in 2021 and by 10.8% next year, while real wages will rise by 8.7% and 3.9%, respectively.

The main assumption underlying the NBU’s macroeconomic forecast is that cooperation with the IMF will continue. The macroeconomic forecast is also based on the assumption that the adaptive quarantine will be maintained without strict restrictions for businesses as vaccination progresses.

Apart from the updated macroeconomic forecasts, the July Inflation Report features a number of highlights, including:

  • Quantitative easing: a one-way ticket?
  • Price-setting mechanisms of Ukrainian businesses
  • Medium-term budget declaration: a novelty for Ukraine and its use abroad
  • Reinvested earnings: data revision practices and the impact on balance of payments indicators
  • How the inflation targeting design affects the deviation of inflation from its target level and target range
  • Current account norm: estimates for Ukraine.
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