Inflation will accelerate moderately in 2024 to 8.2%, but will decline to 6% next year and 5% thereafter. Economic recovery will continue, although it will slow to 3% this year, primarily due to the significant damage done to the energy sector. Over the next two years, GDP growth is expected to accelerate, to 5.3% and 4.5% respectively. The baseline scenario of the NBU’s forecast is based on the assumption that security risks will subside and that conditions for the economy’s functioning will normalize over the forecast horizon. A detailed analysis and macroeconomic forecast can be found in the quarterly Inflation Report for April 2024.
As before, the NBU expects inflation to accelerate moderately this year and return to its target range next year
Inflation is expected to remain low in the coming months, although it will turn upward. In Q2, it will return to the NBU’s target range of 5% ± 1 pp, and temporarily exceed it in H2 of the year. The NBU’s forecast is for inflation to accelerate to 8.2% at end-2024. This will be due to pressures from business labor costs and a further recovery in consumer demand, as well as the fading impact of the temporary factors that led to a more rapid decline in inflation at the beginning of the year. In particular, these are effects of last year’s large harvests and this year’s mild winter.
At the same time, the easing of external price pressures and the NBU’s monetary policy measures will restrain price growth. Maintaining a manageable situation in the FX market will help keep inflation and exchange rate expectations under control, which, in turn, will create room for further key policy rate cuts. This will support lending growth and economic recovery, while protecting hryvnia savings from being eroded away by inflation. At the same time, the NBU will adapt its monetary policy in the event of significant changes in the balance of risks to inflation and FX market sustainability, and will accelerate the easing cycle if there are positive developments.
Economic growth will be restrained in 2024, but will accelerate in the following years
The economic recovery will continue thanks to the high adaptability of Ukrainian businesses and households. This will also be facilitated by a loose fiscal policy, a revival in external demand, the further development of export routes, and rising household incomes. However, the negative impact of the war on economic activity remains significant. In addition, the momentum of rapid growth on the low comparison base of 2022 will gradually be waning.
The NBU predicts that economic growth will slow to 3% in 2024, including due to the loss of energy infrastructure and expected electricity shortages (about 5%, according to the NBU's assumptions). In 2025–2026, GDP growth will speed up thanks to a more rapid normalization of the business environment, to 5.3% and 4.5% respectively. This will be facilitated by improved consumer and investment sentiment, the gradual return of migrants, and progress in European integration reforms. As a result, real GDP will approach its potential level by the end of 2026.
Economic recovery will be accompanied by higher employment and rising household incomes
Demand for labor continues to grow in 2024. Its supply remains constrained due to further outbound migration, mobilization, the need for IDPs to adjust, and worsening labor market distortions. Rapid growth in the demand for workers amid limited supply has led to a decrease in the unemployment rate. Household surveys reveal an improvement in the employment situation. As a result, the NBU has downgraded its estimates of last year’s unemployment rate to 18.2% from 19%, as well as its forecast for the following years.
The unemployment rate is expected to fall to 14.2% in 2024 and to 10%–12% in 2025–2026. However, it will still surpass its pre-full-scale-war levels due to changes in the structure of the economy, outbound and internal migration, uneven recovery by region and industry, and thus widening mismatches between the needs of employers and the skills of workers.
Difficulties in finding qualified workers amid a revival of economic activity will drive household incomes further up. As soon as next year, real wages will exceed their pre-war levels and continue to grow, in part due to tighter competition for labor with foreign employers. Real (inflation-adjusted) household incomes are projected to rise by 8.1% this year and by another 6.5% and 3% in the next two years, respectively.
International aid will remain an important source of financing the budget deficit and international reserves buildup
The NBU keeps its budget deficit forecast for 2024 unchanged at 20.7% of GDP. International aid, which is expected to reach USD 37.9 billion this year, will remain an important source of funds to close the budged gap. External financing is expected to gradually shrink in the coming years: to USD 25.1 billion in 2025 and to USD 12.6 billion in 2026. However, an expansion of the domestic funding base amid a rapid normalization of the economy, as well as additional fiscal measures, will help reduce the budget deficit to 13.5% of GDP in 2025 and to 7.5% in 2026, according to the NBU’s forecast.
Significant international financing will also enable the NBU to continue to cover the structural deficit in the FX market. Going forward, this deficit will taper off as the economy gradually goes back to business as usual. The private sector is expected to raise increased amounts of investment and debt. Meanwhile, FX demand from households will decline. As a result, international reserves will fluctuate within the USD 39–44 billion range in 2024–2026 and will be sufficient to preserve the sustainability of the FX market.
Alternative scenario of the forecast: the economy recovers more slowly, with little change in inflation developments
The full-scale war continues to be the key risk to the forecast. Elevated risks to security, and therefore a slower return of the economy to normal operating conditions, will have a significant impact on major macro indicators.
Under such a scenario, the economy will recover at a slower pace in 2024–2025, by about 3% a year, compared to the baseline scenario. A higher increase, by 5.6%, will only occur in 2026. A worsening of labor market mismatches against the backdrop of intensified migration will restrain consumer and business activity and put more pressure on businesses’ labor costs. Industrial production capacities will also take more time to recover from wartime damage, as will sown areas.
The main factor underpinning the economy will be a more protracted pursuit of loose fiscal policy than under the baseline scenario. The budget deficit, excluding grants from revenues, will be 18% of GDP in 2025 and 12% in 2026. The wider budget deficits in 2025–2026 will be financed by more borrowing, both domestic and external. Specifically, the alternative scenario envisages USD 28.7 billion in international assistance in 2025 and USD 18.5 billion in 2026.
Under this scenario, consumer inflation is expected to temporarily accelerate to 8.6% at the end of 2024, but it will ease off to 5.0%–5.5% in the years that follow. Inflation’s trajectory will therefore be similar to the baseline scenario, but sustaining such a trajectory will require the NBU to spend significantly more international reserves.
On top of updated macroeconomic forecasts, the April Inflation Report features a number of special topics, including:
Inflation Expectations: Impact from Credibility of NBU, Its Communications, and Financial Literacy
Central banks (CBs) are tasked with maintaining low and stable inflation. Inflation expectations play a key role in achieving this goal because they affect people’s decisions whether to consume or save and businesses’ decisions about investment. This is why CBs pay considerable attention to managing inflation expectations and continue to study how expectations are determined and what factors are behind their change.
Previous research has shown that inflation expectations in Ukraine strongly depend on inflation in the past, as well as on the current situation in the FX market and the dynamics of prices for the most commonly used goods and services. The NBU’s recent research proves that an important role is also played by the degree of the CB’s and the banking system’s credibility, the level of financial literacy, and openness of the CB’s communications.
So, the more credible is the NBU for companies, the closer their inflation expectations are to the target and the published forecasts. And the higher the credibility of banks, the lower the inflation expectations of households, especially long-run expectations. Active communications by the NBU help soothe FX market sentiment and lower the inflation expectations of finance experts, while efforts to raise the level of financial literacy contribute to reducing the short-term expectations of the population.
The CB should therefore build up the credibility of its policies by engaging in high-quality communication and taking measures to develop the financial literacy of households. The NBU’s experience indicates that these tools can be effective even under unprecedented uncertainty over the full-scale war.
How Labor Market Has Changed over Two Years of Full-Scale War
Economic crises have a significant impact on the labor market: they are accompanied by growing unemployment and falling labor income. Business outlook surveys reveal that the effects of the Covid-19 crisis and the full-scale war led to staff shortages, but that their causes and consequences were radically different. This is probably due to a more noticeable tightening of the labor market compared to the economic slump that followed the full-scale invasion.
In 2023, the labor force among civilians aged 15–70 contracted by more than a quarter compared to 2021, according to NBU estimates. Almost half of this plunge was due to massive migration abroad. Mobilization, demographic losses, the occupation of territories, and the exit of some people from labor force also played a significant role. The shrinking of labor force participation was widespread in all regions of Ukraine, most noticeably in the areas adjacent to the battle zone.
What is more, remuneration has become an increasingly important element of companies’ hiring policies after the start of the full-scale invasion, as competition for employees is currently more intense. This forces businesses to raise wages at a rate that outpaces productivity growth.
Labor shortages are likely to remain significant, restraining long-term economic recovery. To resolve structural problems in the labor market, joint measures by both businesses and the state are necessary. Such measures must include taking steps to reintegrate veterans and persons with disabilities into the labor market, expanding barrier-free access and adjustment opportunities at the workplace, providing remote work and retraining options, and more.
Impediments to Ukraine’s Trade with Poland: Causes and Effects for Ukrainian Economy
Poland has been comprehensively supporting Ukraine since the onset of russia’s full-scale invasion. During its first year, Poland accepted the largest number of forced migrants, provided financial and military assistance, and became one of the main transport hubs and Ukraine’s largest trade partner, 2022 data shows. Exports of food products from Ukraine, grain crops in particular, have had the strongest impact on scaling up the volume of trade with Poland. Amid a significant retreat in world prices for grains, however, large volumes of supplies from Ukraine also led to difficulties in trade relations between the countries: first the imposition by some EU members states of restrictions on imports of certain food products from Ukraine, then the blockade of border crossings.
The border blockade had a tangible impact on Ukraine’s foreign trade, p rimarily on imports. In the first month of the blockage, the country sustained USD 500 million in outright losses of goods imports and USD 160 million in losses of goods exports. Later on, it became possible to partially make up for the loss of imports by ramping up deliveries via different routes, and for the loss of exports, by increasing the capacity of the new maritime corridor. Its full operation will make it possible not only to compensate for the losses from the border blockade and the imposition of grain licensing, but also to return to conventional markets for Ukrainian exports. Such developments have already been observed in recent months.
Under the baseline scenario of the NBU forecast, the blockade ends in Q2 2024 without having a significant impact on export-oriented sectors. At the same time, import losses were more noticeable for the economy, as they restrained some of the sectors that rely on imports of intermediate and final consumption goods. This short-lived impact on economic activity is expected to be offset by drawing down on existing inventories and catching up on supplies in later periods.
Accuracy of Macroeconomic Forecasts
Macroeconomic forecasts are an integral part of decision making in monetary policy. The effectiveness of the NBU’s monetary policy depends on the accuracy of such forecasts. Therefore, even as the full-scale war grinds on, the annual assessment and analysis of the quality of projections is a necessary element in the central bank’s decision-making process. With this in mind, the NBU has compared the accuracy of its forecasts of four indicators – inflation, GDP, the current account balance, and the key policy rate – with that of the forecasts made by other institutions.
Over the course of 2023, the NBU’s forecasts conventionally remained more conservative overall than the projections compiled by other market participants. This is because losses from errors in the conduct of monetary policy are asymmetric: they tend to be greater when the forecast is more optimistic, and lower when it is more conservative. By accuracy of projections, the NBU takes a middle spot among the institutions used in the comparison.
The inflation forecast for 2023, for instance, had been gradually revised downward by both the NBU and other organizations. In January 2023, the NBU projected that inflation would come in at 18.7% by the end of the year. Its actual value turned out to be much lower. At the same time, the accuracy of the central bank’s CPI forecasts during 2023 remained comparable to previous years. In general, the NBU placed above average by accuracy of inflation forecasts. In a ranking based on unadjusted forecast errors, NBU forecasts landed among the best.