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NBU Comment on Change in Real GDP in 2023

NBU Comment on Change in Real GDP in 2023

In 2023, real GDP grew by 5.3%. This is according to detailed GDP data from the State Statistics Service of Ukraine. On the one hand, GDP growth in 2023 came out rather high following a deep slump (by 28.8%) that occurred in 2022. On the other hand, economic recovery amid active hostilities, high security risks, and russian terrorist attacks was a significant achievement.

Ukraine suffered further losses and destruction as full-scale war dragged on throughout 2023. Specifically, attacks on energy infrastructure continued and electricity shortages persisted at the beginning of last year. However, the energy sector situation stabilized in the second half of February, thanks primarily to quick repairs and reinforced air defense capabilities. Coupled with the high resilience of businesses and households and a loose fiscal policy, this led to a significant slowing, to 10.3%, of the fall in GDP in Q1 2023, compared to the 30.6% plunge in Q4 2022, and put GDP back on a growth track later in 2023.

In the summer, the russians destroyed the Kakhovka HPP, flooding large swaths of land and causing water supply disruptions in the areas south of the HPP site. Air raids halted business activity, causing a noticeable adverse impact throughout the year. Despite all the challenges posed by the war, however, real GDP returned to growth in Q2 2023. In addition to the high resilience of businesses and households, the sustainable situation in the energy sector for most of the year, and a loose fiscal policy, an important role was played by the NBU’s efforts to preserve macrofinancial stability.

The actual rate of growth in real GDP came in slightly lower than the NBU estimated in its Inflation Report for January 2024 (5.7%). This is attributable to likely more conservative estimates of grain and legume harvests by the State Statistics Service, among other things.

Consumption returned to growth

A loose fiscal policy, which fueled domestic consumer and investment demand, made a significant contribution to economic growth. Record defense and security expenditures caused a further increase in the role the public sector plays in the economy. In particular, general government consumption increased by 9% for the year and more than doubled as a share of GDP from two years ago (to almost 42% in 2023, up from about 18% in 2021).

Private consumption grew by 6.1% as real household income started growing again, including thanks to private sector wages. At the same time, the number of Ukrainian migrants who had been forced to go abroad continued to rise, restraining the recovery in consumer demand.

Investment activity soared by 52.9% in 2023

The rapid growth in investments was mainly driven by significant budget expenditures, although the private sector also showed signs of revival of investment amid improved financial performance. Businesses, in particular, invested in supply chain development, energy sector recovery, autonomous power supply equipment, and more.

Decrease in exports slowed significantly, while imports resumed growth

Export supplies were restrained by disruptions to and eventual termination of the Black Sea Grain Initiative as russia single-handedly back out of it, and by the persistence of risks to Black Sea ports’ operations. Concurrently, exports were actively being rerouted. Some of the new export routes went through Danube ports, and a new maritime corridor became operational in mid-2023, made possible by strong support from Ukraine’s defense forces and international partners. By December, its operating capacity had surpassed that of the former Black Sea Grain Initiative. As a result, the contraction of exports decelerated significantly to 5.4%.

Against the backdrop of restrained domestic production due to the fallout from the war and amid a revival of demand, imports continued to grow last year, up by 8.5%. As a consequence, net exports continued to have a negative (6.3 pp) contribution to the change in real GDP, albeit smaller compared to 2022.

Performance indicators of most sectors improved

The favorable dynamics of the indicators in most types of activity during 2023 was shaped not only by the low base of comparison from the first year of the full-scale war, but also by the successful adjustment of businesses to wartime conditions, as well as by significant volumes of budget support.

The most significant increase in gross value added (GVA) occurred in construction. Although the low base effect played a substantial role, growth in this sector was driven, among other things, by budget expenditures to restore destroyed infrastructure as the full-scale war dragged on.

With budget expenditures on security and defense being significant, the GVA of the public administration and defense sector increased for the second year running. Over two years, the GVA of this activity type had risen by more than 46%, and its relative share rose to 22% in 2023, up from about 6% in 2021. The growth in healthcare  resumed as the war inflated the demand for medical services. Substantial defense needs, the processing of high crop yields, and the recovery of domestic demand drove the growth in the manufacturing industry.

The increase in the IT sector’s GVA resumed after last year’s decline. Overall, the sector placed third in terms of the pace of growth (trailing behind only construction and manufacturing). This was in part due to defense needs and the development of public electronic services.

Last year’s extremely favorable weather conditions resulted in record yields for most crops and a respective increase in harvests compared to 2022. As a result, agriculture’s GVA started growing again. Simultaneously, the establishment of alternative export routes helped the transport sector’s recovery and, along with the pick-up in consumer demand, underpinned the growth in the trade sector. 

An increase in private consumption also buoyed a number of service sectors, including the hotel and restaurant business. However, the GVA of the art and recreation sectors, as well as that of professional, scientific and technical activities, declined because of changes in the structure of consumption. The financial sector’s GVA also decreased, which was partially due to the drop in the number of financial intermediaries in the nonbank financial sector.

The decrease in the number of consumers of educational services and restrained state funding of education led to a further decline in this industry’s GVA. The contraction in the energy and mining sectors continued as power generation and metal-ore mining production shrank due to limited export opportunities.

Ukraine’s economy to continue to recover in 2024

Real GDP is set to continue growing throughout this year, according to the NBU’s forecast. The economic recovery will be driven by the sustained pursuit of a loose fiscal policy through significant international assistance, improved business expectations, rising household incomes, and measures by the NBU and the government to maintain macrofinancial stability.

However, risks primarily related to the war remain elevated. Specifically, longer persistence of security risks than previously assumed, a higher intensity of military operations, further destruction of the energy infrastructure, and a strengthening of migration outflows could limit economic growth. The decrease in the yields of major agricultural crops may also have a considerable impact should weather conditions return to their average levels.

These and other factors will be taken into account in the NBU’s updated macroeconomic forecast, which will be presented at the 25 April 2024 press briefing on monetary policy and published in the Inflation Report on 2 May 2024.

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