In 2022, inflation will accelerate to 30%, and the economy will contract by almost 32% due to the damage caused by russia’s full-scale war on Ukraine. At the same time, inflation will slow starting next year, and the economy will grow at a moderate pace. This is according to the quarterly Inflation Report of October 2022.
Inflation will accelerate this year to 30%, but this level is rather moderate, taking into account the wartime challenges and global inflation reaching its peak over several decades
Direct and indirect consequences of the war will remain the main inflation drivers. They include the destruction of production facilities and supply chain disruptions, which result in the decreased supply of goods and services and higher costs incurred by businesses.
Afterward, inflation will start to decline – to 21% next year, and to below 10% in 2024. This will be favored by the gradual setup of logistics and production, a decline in global inflation, the key policy rate being kept at a high level, prudent economic policy of the state, and refusal from monetary financing of the budget deficit next year.
A greater decline in inflation will be restrained by the consequences of the war and high growth rates of administered prices. As a result, inflation is expected to return to the 5% target set by the NBU only in 2025.
The economy will shrink by almost one-third in 2022 and will grow at a moderate pace in 2023–2024.
This year’s economic downturn has been driven by lower domestic demand, disrupted logistics, and large losses of labor force and production potential caused by the war. On the other hand, the recovery of economic activity is facilitated by liberation of occupied territories, faster adaptation of businesses to wartime conditions, and the launch of the “grain corridor” in late July.
The NBU estimates that the economy will return to growth next year thanks to the expected decline in security risks and a pickup in domestic demand and investment activity as production and supply chains are set up and fiscal stimuli remain large. However, the consequences of the war will limit the recovery. GDP will thus grow by around 4%–5% per year in 2023–2024.
The destruction of production facilities, significant migration, and structural disparities will hamper the labor market’s recovery
Labor market conditions have stabilized, but they are still difficult. Even though resume-to-vacancy ratio has decreased, it remains significantly higher than last year.
Unemployment will reach about 30% this year. Economic recovery in the years ahead will contribute to revitalizing the demand for labor and reducing the unemployment rate. However, the latter will stay above its natural level as the economy sustains losses and the imbalances caused by the war deepen.
Nominal salaries this year will decrease by 12%–13%. In real terms (excluding inflation), they will fall by a quarter as businesses’ financial resilience declines and competition among job seekers intensifies. With the shortage of skilled labor in certain sectors persisting and disparities in the labor market being significant, nominal wages next year will increase by almost one-third, above the pre-war level, and in 2024, by another 28%. However, real wage growth will be rather slow, given high inflation and lower-than-pre-war productivity.
International support will remain the main source of financing state budget needs
Fiscal policy is unprecedentedly accommodative and will remain so until the end of 2024. This will support the economy during the war and, coupled with the easing of security risks, contribute to economic recovery. The budget deficit will narrow gradually to 12% of GDP in 2024, down from 25% of GDP in 2022 (grants were excluded from this calculation).
International financing will remain the primary source of covering the budget deficit and maintaining macrofinancial stability. Monetary financing is expected to be phased out completely in 2023.
The key assumption in the forecast is that security risks will start to ease significantly in mid-2023 thanks to the Ukrainian army’s successful operations
Although the NBU makes no projections about military developments, it does make assumptions regarding the security situation, as this factor plays a definitive role in shaping Ukraine’s economic conditions.
The NBU’s forecast also assumes that active international financial support will continue in the coming years and that the IMF will launch a new program to help Ukraine.
However, this forecast does not take into account the rapid implementation of a recovery plan for Ukraine, with a corresponding influx of foreign investments and significant volumes of official financing, because of the uncertainty surrounding the parameters and terms of such a plan. Its implementation can push economic growth into double digits and contribute to a faster return of inflation to the NBU’s target of 5%.
An alternative forecast scenario: should security risks persist for a long time, the economy will grow by only 2% in 2023, but inflation will decline due to subdued consumer demand
The key risk to the NBU’s forecast is that the full-scale war may last longer than anticipated. With this risk looming large, the central bank has developed an alternative scenario of the macroeconomic forecast that assumes that security risks will be there until mid-2024.
Should such a scenario materialize, GDP growth will be weak (about 2%–3% a year) in 2023–2024, and a full economic recovery will only begin in mid-2024. Next year, inflation will decelerate faster than predicted by the baseline forecast (to 13.4%) due to subdued consumer demand and the extension of the ban on increases in utility prices. At the same time, inflation will accelerate sharply in 2024 due to a significant increase in administered prices after the ban is lifted.
Apart from the updated macroeconomic forecasts, the October Inflation Report features a number of highlights, including:
- Tightening global financial conditions: the tsunami of debt
- How changes in consumption are factored into the CPI
- The euro’s role in the currency breakdown of Ukraine’s settlements.