Dragon Capital forecasts Ukraine's GDP growth at 2.5% in case of continued war, 3.5-5.5% under ceasefire scenario
A sustained ceasefire agreement could accelerate Ukraine's real GDP growth in 2025 to 3.5-5.5% year-on-year, up from 2.9% in 2024, as improving economic sentiment and the launch of large-scale reconstruction would help offset a drop in defense spending. In contrast, if the war continues, GDP growth would slow to 2.5%, according to a revised forecast by investment firm Dragon Capital.
"Although weak economic activity in Q1 2025 will be partially offset by stronger prospects in the energy sector, we have revised our 2025 real GDP growth forecast down by 0.5 percentage points to 2.5% under the 'ongoing war' scenario," the company said in a statement released Tuesday.
The GDP forecast under the ceasefire scenario was also downgraded by 0.5 percentage points.
According to Dragon Capital, inflation will begin to ease in June-July amid waning underlying pressures and a high base effect from food prices in the second half of last year.
"We forecast consumer inflation to slow to 8.1% year-on-year by the end of 2025 under the continued war scenario, and to 9-10% year-on-year under the ceasefire scenario," the statement noted.
Regarding the hryvnia exchange rate, Dragon Capital pointed out that in Q1 2025, the National Bank of Ukraine (NBU) allowed the hryvnia to appreciate by 1.4% against the U.S. dollar – to UAH 41.5/$1 – following a prolonged period of controlled depreciation. The firm attributes the currency's strengthening to high inflation, substantial external financing inflows, a global weakening of the dollar, and seasonal drops in demand for foreign currency.
"We expect the NBU to return to a policy of controlled and gradual depreciation in the second half of the year as inflation slows. However, due to stronger-than-expected foreign aid inflows, we've revised our NBU reserve forecast upward to $59 billion (from $41 billion) and lowered our year-end exchange rate forecast to UAH 44/$1 (a 4.4% annual depreciation; previously UAH 45/$1)," the release stated.
The analysts added that a sustainable ceasefire would lead to a slower pace of hryvnia depreciation in H2 2025, as inflationary pressure would be higher but the balance of payments would improve due to reduced private capital outflows and continued external support.
"Going forward, exchange rate dynamics will depend on the volume of foreign aid and private capital flows, while the trade deficit will remain significant due to structural shifts in the economy," Dragon Capital concluded.