Ukraine’s real gross domestic product (GDP) growth in the second quarter of 2023 compared to the same period last year amounted to 18.3% after a decline of 10.5% in the first quarter, such an updated estimate the National Bank of Ukraine published in an inflation report on its website on Friday night.
According to it, the economic recovery will slow to 4.6% in the third quarter of 2023 and 1.8% in the fourth quarter, with a slight acceleration to 2.6-2.2% in the first and second quarters of next year.
In late April, the National Bank expected GDP growth of 15.9% in the second quarter of this year, and 3.9% and 3.7% in the third and fourth quarters, respectively.
Overall, as reported, the NBU improved its forecast for Ukraine’s economic recovery this year to 2.9% from 2.0% in April (including by improving its estimate of the decline in the first quarter from 13.5% to 10.5%), but worsened it for next year to 3.5% from 4.3%.
“The baseline scenario is based on assumptions about Ukraine’s consistent compliance with the obligations of the Extended Fund Facility Program with the IMF, coherent monetary and fiscal policies, gradual leveling of quasi-fiscal imbalances, particularly in the energy sector. Also, the baseline scenario assumes a tangible reduction of security risks from mid-2024, which will contribute to the full unblocking of seaports, reduction of sovereign risk premium and return of forced migrants to Ukraine”, – the National Bank almost verbatim repeated the paragraph of the previous inflation report, but moved the reduction of security risks from the beginning of 2024 to its middle.
Despite this, the key risk to the forecast is still a longer duration and intensity of the war, which could slow economic recovery and worsen inflation and exchange rate expectations, the National Bank emphasizes.
Among other risks, the regulator named a decrease in the volume or loss of rhythmicity of international aid, the resumption of significant power shortages due to further destruction of energy infrastructure, which will limit economic activity and exports and lead to higher imports and demand for foreign currency.
The NBU also pointed out the risks of export logistics constraints due to large-scale terrorist attacks, the emergence of additional budgetary needs and significant quasi-fiscal deficits, particularly in the energy sector; further complications for agro-products exports.
The National Bank estimates the probability of the risk of prolongation of the war and its escalation, as well as eco-terrorism of the occupants, as well as a quarter earlier, at the level of 25% to 50%.
As for the “grain corridor,” which stopped working in June, although the National Bank estimated this risk at 25-50%, now the regulator gives a 15-25% probability of restoring its work and the same value estimates the new risk of continuing food ban by some European countries, which threatens additional losses of $500 million by the end of this year and a possible reduction in crops.
With a probability of 15-25%, the National Bank also assumes such risks as increased emigration and imbalance of public finances (freezing of tariffs on housing and utility services, reduction of international aid, emission financing of the deficit).
The risk of renewed energy deficit due to damage to infrastructure is on the scale of the National Bank, as in April, at up to 15%.
In this report, as well as in the previous one, there is a mention of such a factor as “Marshall Plan”, which can greatly affect and improve the macro outlook, and its probability the central bank kept at 15-25%.
