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NBU Forecasts Lower Inflation in 2023 and a Full-Fledged Economic Recovery from 2024 – Inflation Report

NBU Forecasts Lower Inflation in 2023 and a Full-Fledged Economic Recovery from 2024 – Inflation Report

In 2023, inflation will decelerate to 18.7%, and real GDP will grow only marginally, by 0.3%. Inflation will continue to decline in the coming years, and full-fledged economic growth will be primarily driven by the expected decline in security risks. This is according to the quarterly Inflation Report of January 2023

Inflation will start to decline since this spring

Inflation will decline in 2023 due to tight monetary conditions, slower global inflation, setting-up of logistics, adaptation of businesses, and weak consumer demand amid electricity shortages. Faster disinflation will be hampered by the consequences of the full-scale war.

In the next years, the price pressure will ease thanks to subsiding security risks, recovery of logistics, and larger harvests. As a result, inflation will decline to 10.4% in 2024 and 6.7% in 2025. However, it will slightly exceed the NBU’s target range of 5% ± 1 pp due to the need to gradually bring utility tariffs to their cost recovery levels. On the other hand, the growth in prices for the majority of goods and services in the CPI basket will slow to a single-digit level. In particular, raw food inflation is expected to decline markedly in 2024 and stabilize at 3%–4%.

Economic activity will remain weak in 2023 but will pick up gradually as security risks subside

Businesses and households showed high adaptability in 2022. This factor will continue to support the economy. However, high security risks will limit economic activity in 2023, and electricity shortages will still play a role throughout 2024. Supporting the resilience of the energy system will also be an important precondition for avoiding further economic recession this year.

In 2024–2025, the economy will recover thanks to a decrease in security risks, resulting in an improvement in consumer and business sentiments, a pickup in consumption and investments amid the recovery in production and supply chains, and still-high fiscal stimuli. However, real GDP will be much below its potential level due to large losses of production and human potential. The NBU estimates the economy to grow by 4.1% in 2024 and by 6.4% in 2025.

The baseline scenario of the NBU’s macroeconomic forecast does not take into account a fast-paced implementation of Ukraine’s reconstruction plan and related investment inflows, which might give a significant boost to the economic recovery.

The labor market will be deeply affected by the war, but will also recover slowly

Throughout 2023, unemployment rate will remain high (about 26%). Afterwards, it will decrease as labor demand expands amid a revival of business activity. Unemployment rate is expected to fall to 20% in 2024 and to 17.6% in 2025. Restoring production capacities and removing supply chain disruptions will take a long time, and so unemployment will stay above its natural level.

Household nominal income will rise, in part due to the real economy’s adjustment to operating in conditions of high risks and significant expenditures on defense and security. At the same time, because of significant inflation, real wages will grow slowly: by 3.3% in 2023, and by another 6.5% and 4.3% in the next two years, respectively.

International aid will remain the key source of financing for the budget needs this year

Despite the initiated consolidation, fiscal policy in 2023–2025 will continue to be loose. This is necessary to support the economy in wartime and during a post-war recovery. This year’s budget deficit will remain in the double digits due to the combination of the still limited space to raise domestic revenues and high expenditures. Going forward, however, the budget gap is expected to narrow significantly, to 6% of GDP in 2025.

International financing – including a new IMF program with funding – stands to play a key role in meeting the budget needs, and will make it possible to keep international reserves at a sufficiently high level. International aid along with the NBU’s and the government’s joint actions to revitalize the domestic market for public debt will eliminate the need for the monetary financing of the budget.

The main assumption of the macroeconomic forecast is that security risks will start to ease significantly at the beginning of 2024, thanks to successful operations by the Ukrainian army

This will contribute to the full unblocking of seaports, a decrease in sovereign risk premiums, and the return of displaced persons to Ukraine. The forecast is also based on assumptions of entering a new IMF program, pursuing coordinated monetary and fiscal policies, and gradually neutralizing quasi-fiscal imbalances, in particular in the energy sector.

Apart from the updated macroeconomic forecasts, the January Inflation Report features a number of highlights, including:

  • Factors That Cause Inflation to Deviate from the NBU’s Target of 5%
  • The Impact of Power Shortages on the Ukrainian Economy
  • Ukraine’s 2023 State Budget in Figures
  • Monetary Policy amid a Significant Structural Liquidity Surplus: The Search for an Effective Recipe.
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