19:01 15.05.2024

EU worsens forecast for Ukraine's GDP growth to 2.9% in 2024

4 min read
EU worsens forecast for Ukraine's GDP growth to 2.9% in 2024

Ukrainian economic growth this year will slow to 2.9% after 5.3% in 2023, followed by acceleration to 5.9% next year, according to the European Economic Forecast. Spring 2024 report published on the European Commission's website on Wednesday.

"The war will continue to dampen sentiment and hinder productive capacities, including in the energy sector, where early estimates suggest that between 30-40% of energy generating capacity was destroyed in early 2024. The ongoing conscription of individuals, coupled with the sustained displacement of persons fleeing the war both internally and abroad, will likely continue to generate labour shortages and have repercussions for economic output," the rationale for this forecast is given.

According to the autumn forecast on the European Commission website, it was expected that economic growth in Ukraine in 2024 would slow to 3.7% from 4.8% year-over-year and accelerate to 6.1% next year.

The document explains the better prospects for 2025 by suggesting that early next year the conditions will be in place for a gradual increase in recovery efforts.

Returning to the current year's outlook, the Commission suggests that private consumption will likely slow down due to deteriorating sentiment, but will become the main driver in 2024, supported by lower inflation, strong wage growth, reflecting acute labor shortages, and reducing unemployment.

"Investment is set to continue benefitting from spending both in defence and the construction sector, although heightened uncertainty will keep restraining overall private investment growth," it also said.

It is expected that the revival of the Black Sea transport route will likely support exports, leading to a gradual reduction in the negative contribution of net exports to GDP growth: the export growth forecast for this year has been improved to 6%, compared with 3.3% in the autumn report. However, trade deficits will remain, given the large import needs for recovery, reconstruction and defense.

"This forecast is of course subject to particularly high uncertainty, with risks largely tilted to the downside. An escalation of the conflict could, apart from causing additional human suffering, add to the already high input costs and lead to further loss of production capacity. An increase in the number of people fleeing the war could also exacerbate labour market pressures and weigh on domestic demand," according to the report.

It is indicated that the labor market has shown some signs of stabilization since 2023 against the background of a decrease in net migration outflow and the partial return of internally displaced persons. However, the still large numbers of displaced people both abroad and within Ukraine are likely to continue to disrupt the labor market and contribute to differentiation between regions and sectors.

The updated report improves the unemployment rate forecast to 15.5% in 2024 and 14.1% next year from 16.2% and 14.5%, respectively, in the autumn report.

Rising labor costs, supply disruptions and a rebound in domestic demand, as well as large war-related spending, are expected to keep inflation high in 2024 and 2025. According to the spring forecast, average annual inflation after 12.8% in 2023 will drop to 5.5% in 2024 and rise to 7.8% next year, while in the fall the European Commission expected it to be 7.7% in 2024 and 7.6% in the next one.

As the report notes, the government deficit will remain high but will gradually decline: from 19.7% of GDP in 2023 to 17.7% of GDP in 2024 and 8.7% of GDP in 2025. This is expected to be driven by an excess profit tax in the banking sector (1% of GDP), the expiration of tax cuts on fuel and tobacco (1.6% of GDP), and the ongoing economic recovery.

In connection with the decrease in the estimate of the budget deficit, the forecast for the dynamics of public debt has also been improved: this year it is expected to grow to 94.4% of GDP, next year to 97.8% of GDP, while in the autumn the European Commission expected 96.2% of GDP and 98% of GDP, respectively, 3% of GDP.

"Public debt is projected to increase further given the large financing needs and the increased use of domestic financing at elevated rates, albeit at a slowing pace and remaining below the threshold of 100% of GDP," according to the report.