Inflation will pick up to 8.5% in 2024, but ease to 6.6% next year and go back to the NBU’s 5% target in 2026. Although the economic recovery will continue, its pace will slow to 3.7% this year, primarily due to significant damage to the energy system. In the next two years, real GDP growth will accelerate to 4%–5%.
The baseline scenario of the NBU’s forecast assumes that economic conditions will keep normalizing within the forecast horizon. The quarterly Inflation Report for July 2024 outlines a detailed analysis and forecast of the macroeconomic situation.
Inflation will increase this year, but will stay moderate and head back to the NBU’s 5% target going forward
The higher inflation over the next three quarters will reflect the fading effects of last year’s large harvest, further pressure on business costs due to power and labor shortages, excise tax hikes, and the summer drought’s adverse effect. However, inflation will remain moderate, coming in at 8.5% at the end of 2024.
The pullback in inflation in 2025–2026 will be driven by the NBU’s prudent and balanced monetary policy, a slower increase in external prices, the gradual normalization of the economy’s functioning, and improvements in the energy situation.
Although this year the economic recovery will slow, it will accelerate in the coming years
Real GDP grew by 6.5% yoy in Q1. In Q2, growth decelerated primarily due to a substantial deficit of electricity, by NBU estimates. The damaged energy infrastructure will take significant time and resources to rebuild. The shortage of power will therefore persist within the forecast horizon and restrain economic growth.
However, considerable budget expenditures, the further development of export routes as demand for Ukrainian exports revives, the spread of distributed power generation, as well as the economy’s continued gradual normalization, will ensure that real GDP grows by 3.7% in 2024, by 4.1% in 2025, and by 4.8% in 2026. But GDP will still be below its potential level, curbing inflationary pressures.
Economic growth amid labor shortages will be accompanied by rising employment and wages
Further migration abroad and mobilization have limited the labor supply. The lack of workers restrains business activity, but leads to an improvement in employment and fuels wage growth.
Even if economic conditions normalize further, the return of migrants to Ukraine will be sluggish, as they are increasingly adapting to living abroad. Labor market mismatches will also remain uneven across regions and sectors and will be shaped by changes in the structure of the economy. With such developments taking place, the unemployment rate will gradually edge lower, to 13.9% in 2024, 11.4% in 2025, and 10.3% in 2026.
Meanwhile, tighter competition for workers, including with foreign employers, and the economy’s recovery will spur the growth in private sector wages. Real wages are expected to surpass their pre-war levels during 2025 and rise further.
Aid from abroad will remain an important source of financing the budget deficit and replenishing international reserves
With defense needs rising, the NBU has revised upwards its forecast of the budget deficit for this year to 22.8% of GDP. International aid, seen to reach about USD 38 billion this year, will remain an important source of funds to close the budged gap. In 2025 and 2026, external financing will gradually shrink to USD 31 billion and USD 21 billion, respectively. In the meantime, the expansion of the domestic funding base will help narrow the budget deficit to 17.8% in 2025 and 10.3% in 2026.
External financing will enable the NBU to maintain a sufficient level of international reserves. By the end of 2024, they will have come close to USD 41 billion. Going forward, as international support expectedly declines, reserves will gradually diminish to USD 37 billion in 2025 and USD 32 billion in 2026. However, they will be sufficient to preserve the sustainability of the FX market and ensure moderate two-way fluctuations in the exchange rate as market conditions change.
Apart from the updated macroeconomic forecasts, July’s Inflation Report features a number of highlights, including:
- Friend-Shoring for the EU: An Opportunity for Ukraine?
The Covid-19 pandemic and russia’s war against Ukraine have shown the value for the EU of sustainable access to key resources and that no geopolitical influence levers exist, especially in strategic sectors. The EU’s heavy reliance on some imports from countries pursuing a different geopolitical agenda is creating incentives to switch over to trading with geopolitically closer states. Specifically, about 20% of EU imports over the past decade have come from China. Moreover, russia accounted for more than 7% in 2015–2022. As soon as 2023, however, russia’s share tumbled by 4.7 pp after the EU imposed economic sanctions and diversified its imports.
As a result, the EU may be interested in cooperation with Ukraine to diversify the supply of goods or relocate their production. Ukraine’s prospects are cautiously optimistic both in traditional sectors (agriculture and metals-and-mining) and in the manufacture of technological goods, particularly those made by the military-industrial complex.
By clearly articulating its geopolitical priorities and participating in accession negotiations opened by the EU, Ukraine improved its chances of both further expanding its access to the European market and raising investments from EU partners, potentially boosting export revenues. This potential will materialize provided that security risks abate and European integration reforms are actively implemented. Efforts to expand the supply of labor, including through the return of forced migrants, and to restore the energy system will also be important.
- Ukraine’s Gross International Reserves: How Much Is Enough in Wartime?
Countries build up international reserves to meet several goals. First, international reserves cushion the economy from external shocks in times of financial crises, from price fluctuations on global commodity markets, etc. Second, central banks use international reserves to maintain the sustainability of the FX market. Third, international reserves ensure the banking system has enough FX liquidity to survive a crisis. A sufficient level of international reserves reinforces investor confidence in the country’s economic resilience, potentially reducing the cost of borrowing from global capital markets.
As the world’s recent experience has shown, there is no such thing as too much of reserves. In theory, part of excess international reserves can be transferred into sovereign wealth funds for more profitability, though this reduces the reserves’ liquidity. The 2008 crisis, for one, proved that international reserves accumulated by some emerging markets provided an essential buffer against the depreciation of their currencies, secured more stable credit ratings for these countries, and afforded them better access to external financing.
Moreover, international reserves create a cushion that is especially important for countries in the middle of a war. In times of military conflict, the sources of FX inflows dry up significantly. High uncertainty and the ensuing considerable sensitivity of economic agents manifest in the FX market. The economy faces the risk of, or actually enters, a recession, and the probability of sudden shocks, most of them adverse, soars. Under such conditions, the speed of the central bank’s response and actions depends on whether it is possible to stop the destabilization of the financial system and economy and to anchor the behavior and expectations of economic agents and external partners.
Ukraine's international reserves currently exceed 110% of the minimum level required under the IMF’s composite metric. This level has been achieved through generous international financial support, whose availability and regularity remain vital within the forecast horizon. Amid high uncertainty and significant war-driven shocks to the economy, this level of reserves provides a buffer to maintain macroeconomic stability, particularly if adverse events occur.