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Inflation to Start Declining and Economy to Return to Growth in 2023 – Inflation Report

Inflation to Start Declining and Economy to Return to Growth in 2023 – Inflation Report

The consequences of the full-scale russian invasion are causing major losses to the economy of Ukraine and generating a strong inflationary pressure. As a result, in 2022, inflation will be somewhat above 30% and GDP will decrease by a third. Next year, the economy is expected to return to growth and inflation is projected to get back on the downward trend. This is according to the quarterly Inflation Report of July 2022

Inflation will accelerate by the end of the current year and will start to decline in Q1 2023

Inflation will accelerate by the end of 2022 and will reach 31% as the majority of supply shocks are persisting. The latter include the consequences of hostilities and high energy prices. 

Inflation is expected to slow next year thanks to improved inflation expectations, set up logistics, and a gradual increase in harvests. Lower global inflation and the NBU’s tight monetary policy will have an additional disinflationary effect.

On the other hand, disinflation will be restrained by high energy prices and the need to gradually bring energy tariffs for households to market levels. Consumer inflation will thus decrease to around 20% in 2023, decelerating to single-digit values only in late 2024. 

The consequences of the war will cause the Ukrainian economy to shrink significantly in 2022, but the economy will return to growth in 2023

The russian invasion resulted in a sharp fall in economic activity and weakened the country’s economic potential. Economic activity has been reviving since April, particularly thanks to the liberation of northern oblasts and a decrease in the number of regions affected by active hostilities. However, the economy has been operating in lower gear compared to the pre-war period. As a result, real GDP will decrease by a third in 2022.

Provided that security risks subside, it is expected that in 2023 the economy will return to growth on the back of a pickup in consumer demand, technological and logistical processes will be set up, and investment activity will recover, among other things, thanks to Ukraine’s European integration prospects. At the same time, the large losses of production and human potential will be a drag on economic recovery. In 2023–2024, GDP will grow at a pace of around 5%–6% per year. 

The labor market is gradually recovering after being frozen at the start of the war. In the meantime, labor supply considerably exceeds demand, leading to high unemployment and lower wages 

The full-scale war has resulted in a humanitarian crisis and active migration, including emigration, which will determine the demographic development and labor market conditions for many years to come. 

The deep economic recession caused a sharp increase in unemployment (which hit around 35% in Q2 2022). Unemployment will gradually decline going forward but will remain above its natural level due to long-term effects of the war. 

The large decrease in economic activity also led to a steep fall in household income. At the start of the war, businesses tried to pay wages in full, but now most of them are not able to maintain the pre-war compensation of employees as hostilities continue and their financial standing is deteriorating. As a result, in 2022, wages will drop by 12% in nominal terms and 27% in real terms (i.e., excluding inflation). 

Further on, as the economy recovers and demand for labor revives, nominal wages will grow rapidly to exceed the pre-war level already in 2023. However, in 2024 real wages will be still lower than before the war because of inflation.

The key assumption of the forecast is that security risks will decline significantly by the end of this year thanks to the success of the Ukrainian army

The NBU based its forecast on the assumption that Ukraine’s Black Sea ports will fully recommence operations from the beginning of 2023. Overall, security risks are expected to subside markedly in 2023–2024. Nevertheless, they will remain important, making the domestic and foreign investors reluctant to invest. 

At the same time, the NBU expects that active financial support to Ukraine from the international community will continue to help the country finance its budget needs and close its balance of payments gaps, including through the successful implementation of a new IMF facility in 2023–2024. 

The NBU’s and the Ukrainian government’s policies will be gradually normalized. The NBU will return to the usual principles of inflation targeting with a floating exchange rate, while gradually discontinuing the practice of the budget’s monetary financing. The government will return to borrowing from the market to cover the budget deficit by ensuring proper yields, while also conducting a fiscal consolidation policy and narrowing quasi-fiscal imbalances.

At the same time, an equivalent of the Marshall Plan for Ukraine was not taken into account in the current baseline scenario, as the plan’s parameters and terms of implementation have not yet been determined. The approval and implementation of this project in the near future will give a significant impetus to economic recovery and speed up GDP growth to a two-digit level.

Alternative forecast scenario: if 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 full-scale war has become the main factor determining the state and prospects for the development of the Ukrainian economy. Therefore, one of the biggest risks to the NBU’s macroeconomic forecast is that the war will last longer than expected. Considering the importance of this risk, the central bank has published an alternative scenario of its macroeconomic forecast.

More specifically, if high security risks persist for a long time, economic activity will remain depressed in 2023 – GDP will grow by only 2%, and full-scale recovery will not begin until 2024. Limited access to Black Sea ports and related negative effects on the agricultural sector will remain the major restraining factor.

After rising to over 31% this year, inflation will begin to decline next year, dragged down by weak consumer demand, only to accelerate again in 2024, driven by rebounding consumer demand.

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

  • Unbalanced inflationary expectations amid supply shocks: is there room for delaying monetary policy decisions?
  • Factors that cause inflation to deviate from its target in wartime
  • The specifics of, and the methods for, nowcasting GDP in wartime
  • Monetary policy lessons in wartime.
Background information: 

At the onset of the war, the NBU took a break in publishing inflation reports due to the high uncertainty caused by the large-scale russian invasion of Ukraine, which made it impossible to forecast economic processes with an acceptable degree of probability. 

Uncertainty still remains high, but it is now lower than at the initial stage and is approaching the level when the central bank can produce relatively reliable macroeconomic scenarios. This publication of the NBU’s macroeconomic forecasts will enhance the transparency and improve understanding of the central bank’s monetary decisions.


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