Inflation will slow to 7.7% this year, but its return to the NBU’s 5% target is expected by the end of 2023. In 2022, Ukraine's real GDP will increase by 3.4%. Afterwards, economic growth will accelerate to about 4% annually. This is according to the quarterly Inflation Report for January 2022.
NBU revised its inflation forecast for 2022 to 7.7% from 5%. Inflation is expected to return to the 5% target in 2023
Achieving the inflation target in 2022 will primarily be impeded by the pass-through of second-round effects from high external prices for energy and food. This will be reflected in the prices of a wide range of goods and services. Growing business expenses on labor and the adjustment of administered prices will have a significant impact. Price pressures from Ukraine’s MTPs, where inflation rates are only approaching their peaks, will stay elevated. Sustained domestic consumer demand will also restrain disinflation. Mounting geopolitical tensions in late 2021 through early 2022 will also generate strong price pressures through the exchange rate channel and the expectations channel.
In contrast, the gradual slowdown in inflation will be facilitated by the tightening of the NBU’s monetary policy. The NBU has already raised its key policy rate to 10% in January and announced further plans to strengthen its monetary policy. In H1 2022, the central bank will therefore make a transition to tight monetary conditions. According to the NBU’s current forecast, a cycle of key policy rate cuts will not begin before the end of 2022.
Other important factors contributing to the slowdown in inflation include the correction of global commodity prices, the impact of last year’s record harvests, the fade out of the global inflation surge, and the end of the pandemic.
As a result, inflation will continue to decline and will decelerate to 7.7% by the end of the year. Over the course of the year, however, inflation dynamics will be rather volatile due to base effects. Core inflation in the short run will also remain at about 8% because of the second-round effects of the pass-through of production costs. However, as a result of the tighter monetary policy stance, it will fall to 6% by the end of 2022.
Headline inflation is expected to return to the NBU’s target of 5% at the end of 2023.
Ukraine’s economy in 2022 will grow more slowly than previously anticipated. In 2023–2024, GDP growth will accelerate to about 4%
The NBU has downgraded its forecast for Ukraine’s economic growth in 2022 to 3.4% from 3.8%. The reasons include high energy prices, the fallout from geopolitical tensions, the global shortage of certain products, and the consequences of the COVID-19 crisis.
These factors will partially affect the economy in 2023, in particular due to the adverse impact of geopolitical tensions on this year’s investments. With this in mind, the NBU has downgraded its GDP growth forecast for 2023 to 3.7% from 4%. Going forward, the economy will accelerate growth to 4%.
The further economic recovery will be driven by the normalization of geopolitical conditions, the growth in the global economy, and the persistence of rather benign terms of trade. The rollout of vaccines, accompanied by the further revival of production and supply chains worldwide, will also give growth a boost. This will help increase production and revive investment activity in Ukraine.
Private consumption, despite a certain slowdown, will remain the main driver of the economy. Specifically, consumer spending will grow at a pace of about 5%–6% a year due to increased real income.
The NBU’s monetary policy, though tight, will not be an impediment to economic growth. First, the flexibility of inflation targeting allows inflation to deviate from the target for a longer period of time to minimize losses to economic growth. Second, the NBU’s consistent policy will help ensure macroeconomic stability, mitigate investor concerns, and thus maintain foreign capital inflows into Ukraine.
The growth in domestic demand, both consumer and investment, will drive the widening of the current account deficit to 3.3%–3.5% of GDP in 2022-2024. However, it will be close to its equilibrium level.
Economic recovery will contribute to a gradual improvement in the labor market, which, however, will be slower than expected due to existing imbalances and the impact of quarantine restrictions
Unemployment will decline further, but its slowdown to the natural level (8.5%) will occur later than expected, in particular it will decline to 9.1% in 2023 and to 8.9% in 2023. Professional qualification disparities between supply and demand will prevent faster improvements in the labor market.
The drivers mentioned above and high demand for the labor force abroad will push up the wage growth rates in 2022: nominal wages will grow by 15.2%, while real ones (adjusted to inflation) will increase by 6.1%. At the same time, given the gradual reduction of the gap between wages in domestic and foreign markets, as well as the expected retraining of employees and, consequently, reducing labor market mismatches, in 2023 the growth rate will fall to 10.2% for nominal wages and to 4.1% for real ones.
The primary assumption underlying the current macro forecast remains that Ukraine will continue to cooperate with the IMF
It is especially essential against a deteriorating information backdrop as geopolitical tensions loom large and competition for capital intensifies amid the tighter monetary policy pursued around the globe.
Key risks are still posed by an escalation of the military conflict with Russia and a longer and more pronounced global price surge than expected earlier.
In addition to the updated macroeconomic outlook, the January 2022 Inflation Report features a number of special topics, including the following:
- Assessments of Reaching the Inflation Target
- Main Indicators of Ukraine’s 2022 State Budget
- СВАМ – Threat for Ukraine or Chance to Upgrade Economy?
- How Commodity Terms of Trade Affect Monetary Policy