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Inflation to Remain Moderate and Economy to Keep Recovering – NBU Inflation Report

Inflation to Remain Moderate and Economy to Keep Recovering – NBU Inflation Report

By the end of 2023, inflation will slow to 5.8% and remain moderate over the forecast horizon, despite some acceleration next year. The economy will grow by almost 5% this year and by another 3.6% in 2024. This forecast assumes that high security risks will persist until at least the end of 2024. The detailed analysis and macroeconomic forecast can be found in the quarterly Inflation Report of October 2023.

Inflation will remain moderate in 2023–2025 

At the end of this year, consumer price growth will slow to 5.8% (down from 26.6% in 2022). The faster-than-expected decline in inflation will be primarily driven by a larger supply of foods amid higher harvests, increased production, and difficulties with agricultural exports.

Going forward, the impact of this factor will gradually wear off, which, together with this year's low base for food prices and persisting pressures on business costs from wages and energy, will spur inflation to 9.8% at the end of 2024.

In 2025, consumer price growth will slow to 6% as security risks subside, allowing businesses to gradually restore logistics and production. At the same time, prices will remain under pressure due to imbalances in the labor market, increased consumer demand, and rising administered tariffs.

Over the forecast horizon, the aim of NBU's monetary policy will be to continue providing means for Ukrainians to protect their savings from inflation through attractive yields on hryvnia term deposits. This will restrain the pressure on the FX market and enable the NBU to ensure exchange rate sustainability and keep inflation at a moderate level.

The economy will recover despite the challenges of war

Ukraine’s real GDP will grow by 4.9% this year. The significant improvement in the economic forecast is due to the higher adaptability of Ukrainian businesses and households to wartime conditions, higher harvests, faster expansion of alternative exporting routes, and increased budget support.

The economic growth forecast for 2024–2025 remained almost unchanged, despite the assumption that security risks will persist for a longer time. GDP will grow by 3.6% next year thanks to continued budget support, high adaptability of businesses, and gradual development of alternative logistical routes. Further on, economic growth will accelerate to 6% in 2025. This will primarily be facilitated by a decline in security risks and a subsequent revival in consumer and investment demand amid still significant budgetary stimuli for the economy.

Considering the scale of losses, potential output will not reach its pre-war level by the end of 2025. At the same time, economic growth will speed up markedly if international investors implement a large-sale reconstruction plan for Ukraine, which is not currently envisaged by the baseline scenario of the NBU’s forecast.

Employment and households’ labor income will gradually increase as the economy recovers

The unemployment rate will continue to decline, but will remain above pre-invasion levels. It is expected to decrease to almost 19% this year, to 16.5% next year, and to under 15% in 2025. The labor market’s recovery will be restrained by structural mismatches aggravated by the war’s consequences: migration and unevenly distributed economic recovery by industry and region.

Household incomes have returned to growth, by NBU estimates. In 2023, nominal incomes will increase by almost 18%. Real incomes (inflation-adjusted nominal incomes) stand to rise by about 4%. In 2024–2025, households’ real incomes will also grow. The recovery in economic activity and the maintenance of the loose fiscal policy will help increase incomes over the entire forecast horizon. An additional post-war catalyst will be the growth in the demand for labor to meet reconstruction needs.

Foreign aid will remain an important source for financing the budget deficit and covering the current account deficit in 2023–2025

The budget deficit, excluding grants in revenues, will reach almost 29% of GDP in 2023. Amid a longer period of high risks to security, the significant deficit (more than 20% of GDP) will continue into 2024. A decline in these risks will make it possible to launch a fiscal consolidation that, accompanied by the further growth in budget revenues, will help reduce the budget deficit to 13% of GDP in 2025.

Despite the increasing role of the domestic debt market, a significant part of budget needs will be financed by international aid. It is assumed that the amount of foreign support this year will exceed USD 45 billion. In 2024 and 2025, official financing will remain significant, although it will gradually decrease to USD 38.5 billion and USD 25 billion, respectively. Debt levels will remain high without putting significant pressure on the budget in the coming years.

Substantial external aid disbursements will also ensure a net inflow of foreign currency, despite the persistence of its deficit in the private sector amid limited exports and a considerable need for imports.. As a result, international reserves will grow to above USD 41 billion by the end of this year and will stand at approximately USD 45 billion in 2024 and 2025. 

In addition to the updated macroeconomic forecasts, the October Inflation Report features a number of special highlights, including:

  • Low Long-Term Yields: Sic Transit Gloria Mundi
  • A Widening of the Trade Deficit due to Wartime Shocks: Is There Room for Simple Solutions?
  • On the Way to Floating: Global Best Practices in Applying Different Exchange Rate Regimes in Wartime and the Post-War Period
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