Economic growth in 2024/25: As good as it gets
Ukraine’s GDP is set to moderately grow in 2024 and 2025 with rates of 3.6% and 3.4%, respectively. Driven mainly by private consumption and partly by investments, this level of growth seems to be the “new normal” during the challenges of the ongoing war, namely the destructions in the energy system and mobilisation.
While it continues to demonstrate resilience, it is also clear that a recovery to pre-war levels is still far off. As we slowly approach 2025, international efforts to preserve economic resilience, especially in terms of financial aid, are of paramount importance.
Moderation of growth in 2024 and 2025
After real GDP increased by 5.3% in 2023, the economy lost steam during 2024, as growth is forecast to reach 3.6%. It will further moderate to 3.4% in 2025. Thus, Ukraine remains far from a sustainable recovery towards pre-war levels. The ongoing destructions in the energy sector, as well as the impact of mobilisation on the business sector limit growth opportunities. Key assumptions behind the forecast are the further development of the war, whose intensity will most likely decline by mid-2025, as well as the continuation of significant external financial support.
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Supply side
We forecast a slight acceleration of growth (at 3.4%) in agriculture in 2025 after 2.1% in the current year, as the harvest of major crops will improve. Farmers continue adapt to the “new normal”, and seaborne export logistics improve. The new export corridor has roughly doubled export volumes versus the “Black Sea Grain Initiative” previously in place.
Industrial production (4.1% in 2024, accelerating to 5.1% in 2025) is subject to diverging trends. The situation in the electricity sector is very fragile, and overall negative for growth. On the other hand, many enterprises have invested to shield their activities from frequently occurring power cuts. Another driver of industrial growth is the emerging defence sector, which is however hard to estimate due to the (necessary) classification of data.
The trade (5.7% in 2025) and transport (7.6% in 2025) sectors will continue to grow as there is an increase in external trade capacity thanks to the reopening of Odesa ports. The transport sector is additionally supported by growing passenger flows, including the temporary return of externally displaced persons, as well as rising e-commerce orders.
Demand side
Real private final consumption will increase by 5.1% in 2025 (after 4.1% this year) due to growing real wages, the indexation of social payments and high savings that were not used before. Investments will also grow (8.8% in 2025 after 18.8% this year) supported by defence activities as well as emergency reconstruction and repair needs in the energy sector but will have a much smaller impact on economic growth. The security situation and the corresponding financing environment continues to hold back investment, especially private one.
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External sector
The current account deficit is projected to gradually widen to 6.9% of GDP in 2025. This reflects increasing goods imports (in line with growing domestic demand) at a time when exports are stagnating in nominal terms. Exports benefited from improved export logistics in physical terms but suffered at the same time from lower prices. Other components of the current account include the refugee spending abroad (which is set to decline somewhat) as well as the transfers and remittances. Especially foreign grants to the budget (secondary income) are difficult to project with accuracy. Overall, we foresee a decline of transfers and remittances from USD 28.2 bn this year to USD 25.4 bn next year.
Given the above, it is not surprising that the exchange rate showed a weakening tendency, as the figure below shows. The National Bank allowed for more flexibility since end-2023, a trend which we think will continue. At the same time, it stands ready to intervene at the market when adverse exchange rate dynamics are observed. The current FX reserve level of USD 42 bn – bolstered by financial aid – seems sufficient for that.
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Inflation is picking up again
Inflation bottomed out at 3.2% in Apr-24 and is currently rising to 7.5%, which is above target. Rising power tariffs, food prices as well as the depreciation mentioned above are reasons for this development. While we expect a slight decrease of inflation to 6.5% at end-2025, we think the National Bank will keep its interest rates on hold.
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Funding the fiscal deficit is key
The fiscal situation will remain difficult both this and next year. To improve the fiscal situation, the Government initiated amendments to the Tax Code, which were supported by the Parliament, but in narrower terms. The draft law is still being debated, but it is likely that the corporate profit tax rate for banks will be set at 50% (currently 25%). However, the government and the parliament still did not agree on the increase in the VAT rate.
As a result, the revised State Budget Law for 2024 envisages a sharp increase in domestic borrowing, which would be difficult to reach. The coordination between monetary and fiscal policies indeed is expected to help: the NBU recently revised its regulations to enable higher domestic government bond holdings by banks.
Overall, the consolidated fiscal deficit is expected to decrease from 23.5% of GDP in 2024 to 20.3% of GDP in 2025 (grants are here not accounted as revenues). External support will be financing the deficit. While for 2024 it seems rather secured, including the successful debt restructuring, there are still risks for 2025.
Less than half of the external financing, envisaged in the draft State Budget Law for 2025 at USD 38.8 bn, is currently secured, with EUR 13.3 bn being expected under the Ukraine Facility from the EU. Another IMF tranche is on the table if Ukraine sticks to the programme. Currently, there is a staff level agreement on the fifth review of the programme – Ukraine never went so far during an IMF programme.
Therefore, the recent announcement by the European Commission on the provision of a loan of EUR 35 bn (as part of a broader G7 loan of USD 50 bn to Ukraine secured by the proceeds of frozen Russian assets) is very important. In fact, Ukraine will urgently need part of this money already at the beginning of 2025 to finance priority spending other than defence and security.
According to our current estimate, public debt might approach 100% of GDP already in 2025. However, if financial assistance from the EU comes as grants, this level will be lower.
This newsletter is based on the Economic Monitor for Ukraine.
