The EBRD has revised down its growth forecast for the Ukrainian economy for 2025.
The European Bank for Reconstruction and Development (EBRD) has reduced its GDP growth forecast for Ukraine in 2025 by 1.2 percentage points. The current growth forecast stands at 3.5%, compared to the 4.7% anticipated in the September report. This revision is a result of prolonged economic pressures due to the full-scale war with Russia and rising inflation in the country. This information is reported by the EBRD in its "Regional Economic Prospects" report.
Despite these challenges, the Ukrainian economy grew by 3.0% in 2024, which is a significant achievement amidst the ongoing war. However, the second half of 2024 showed a slowdown in economic growth, dropping from over 5.0% in the first half of the year to around 2.0% in the latter half. Increased electricity prices, adjustments in utility tariffs, and the depreciation of the hryvnia have been the main factors affecting inflation growth.
It is expected that the resilience and adaptability of Ukrainian businesses, the well-functioning Black Sea trade corridor, and the increase in military procurement by domestic enterprises will contribute to economic growth. In 2025, Ukraine will continue to grapple with a budget deficit projected at 19.4% of GDP. This will be fully financed through external budget funding amounting to $38.4 billion.
The aforementioned amount includes $13.7 billion from the EU under the Ukraine Extended Financing Mechanism, $22.0 billion from G7 countries based on proceeds from frozen Russian assets, and $2.7 billion from the IMF. The Ukrainian economy is forecasted to grow by 5.0% in 2026, provided that an agreement on cessation of hostilities is reached this year.
What does it mean for the Ukrainian economy to approach its potential level?
The answer to this question was provided by Anton Gruy, head of the macroeconomic forecasting department of the Monetary Policy and Economic Analysis Department, in a column for the publication "Economic Truth." Key points:
The potential GDP level is an unobservable magnitude used by central banks to assess the stage of the economic cycle. When GDP is above the potential level, it indicates that production factors in the economy are being utilized "to the fullest." Additional demand stimulation will lead to an increase in the cost of attracting labor and capital and, consequently, to rising inflationary pressure. Conversely, when GDP is below the potential level, it signals that production factors are not fully engaged due to weak demand. This reduces pressure on the prices of production factors and, consequently, inflation. In 2024, Ukraine's GDP recovered to its potential level, as evidenced by the utilization of existing production capacities at the 2021 level. The economic recovery fuels demand for labor and leads to rising wages, which is reflected in prices. High demand for production capacities increases capital prices. At this stage of the economic cycle, aggregate demand has ceased to play a disinflationary role.
Fundamental inflationary pressure, driven by rising production costs, justifies the need for the National Bank of Ukraine (NBU) to tighten its monetary policy. According to the NBU's baseline scenario, the economy has exhausted its recovery potential through stimulating aggregate demand and actively utilizing available resources. Further economic growth will depend on the accumulation of production factors. Firstly, one of the key factors will be the return of migrants from abroad. The NBU anticipates a net positive migration starting in 2026. Secondly, productive capital in Ukraine will grow due to reforms and the adaptation of technologies from developed countries. In particular, the process of European integration will boost foreign trade and attract foreign investments – a source of funds, expertise, and technologies. At the same time, essential conditions for development remain price and macro-financial stability, which will be the focus of the NBU's monetary policy.