Inflation to Remain Subdued, Economy to Recover – NBU Inflation Report

Inflation will accelerate moderately in 2024, but will enter the NBU’s target range next year, declining to 5.8%.
In 2026, inflation will decrease to 5%.
The economic recovery will continue, but it will slow to 3.6% in 2024.
In the next two years, GDP growth is expected to accelerate to 4–6% per year.
This forecast is based on the assumptions that high security risks abate from 2025 and that significant international aid inflows continue.
The detailed analysis and macroeconomic forecast can be found in the quarterly Inflation Report for January 2024.
Although inflation stands to accelerate in 2024, it will remain moderate and return to the target range in 2025
Consumer inflation eased to 5.1% yoy at the end of 2023 due to the significant supply of food products, less pressure on business costs, and continuous exchange rate sustainability.
In the first months of 2024, consumer inflation will remain close to current levels, but will edge higher in H2 2024 to reach 8.6% at the end of the year.
This will primarily be driven by the fading effect of extremely favorable weather on the supply of foods and by the growth in business costs, including the compensation of employees.
As security risks recede, inflation will slow to 5.8% in 2025 and return to the 5% target in 2026.
This will be facilitated by both an easing of external inflationary pressure, partially due to cheaper energy, and the NBU’s consistent monetary policy.
To keep inflation subdued in 2024 and bring it to the target in the following years, the NBU will continue to pursue a monetary policy that supports exchange rate sustainability.
Safeguarding the attractiveness of hryvnia instruments – by maintaining a level of interest rates on hryvnia deposits that protects hryvnia savings from losing value – will remain one of the NBU’s important tasks.
Economic growth will decelerate in 2024, but will pick up going forward
Thanks to higher-than-expected harvests of late crops, as well as greater adaptability of households and business to crisis conditions, the NBU has upgraded its estimate of real GDP growth in 2023 to 5.7% from 4.9%.
Loose fiscal policy, which helped revive consumer and investment demand, was a significant factor in improving the estimate.
In 2024, real GDP will continue to grow, albeit at a slower pace (3.6%).
The recovery will be driven by loose fiscal policy, a further strengthening of domestic demand, and an expansion of supply chain capacity.
However, security risks will continue to run high, a factor that together with the scale of losses and destruction will restrain economic growth.
A likely drop in harvests after last year’s record yields will also have an impeding effect. 
In 2025–2026, economic growth will accelerate to 5.8% and 4.5%, respectively.
Expectations will generally improve as security risks ease off.
This will make it possible to optimize supply chains and restore production.
The stimulating effect of fiscal policy will also endure.
However, the fallout from the war, including massive destruction and labor market mismatches, will weigh the economy down as it recovers.
Ukraine’s GDP will approach its potential level at the end of 2025, but will not return to pre-invasion levels over the forecast horizon.
Economic recovery will be accompanied by higher employment and rising household incomes
Labor demand went up in 2023.
The number of new vacancies almost returned to the level of 2021.
However, the labor market’s revival is significantly hampered by war-induced structural mismatches and labor shortages.
So the unemployment rate will decrease moderately to 16.2%–12.2% in 2024–2026, down from 19% in 2023.
At the same time, unemployment will remain above its natural rate due to the adverse impact of the war.
Personal incomes returned to growth in 2023, both in nominal (up 17.1%) and real (up 3.5%) terms (i.e.
after subtracting inflation).
Household incomes will continue to grow as the economy revives.
In the post-war period, income growth will also be driven by intensified competition for workers between Ukrainian and foreign employers.
International aid will remain an important source of financing the budget deficit and capital inflows from abroad
Driven by high expenditures on defense and security, the budget deficit will be significant (20.7% of GDP) in 2024, but smaller than last year.
International aid will continue to be a substantial source of funds to cover the budget deficit.
Ukraine stands to receive about USD 37 billion in aid this year.
International financing is expected to decline in the coming years, but only gradually, without posing risks to the sustainability of public finances.
The easing of security risks and the strengthening of the domestic funding base amid an economic revival will make it possible to reduce the budget deficit in 2025–2026 to 13.5% and 7.5% of GDP, respectively.
External support in 2024 will also fully make up for the still-high FX outflows from the private sector.
Investment and borrowing by the private sector will increase as security risks die down going forward, and households’ demand for foreign currency will subside.
The global economic revival will facilitate an increase in income from IT services and remittances.
Imports of travel services are also expected to decrease.
As a result, Ukraine’s international reserves are projected to fluctuate within the USD 37–42 billion range in 2024–2026 and will be sufficient to ensure exchange rate sustainability.
In addition to the updated macroeconomic outlook, the January Inflation Report features a number of special topics, including the following:
Factors That Brought Inflation to Its Target in 2023 Development of Ukraine’s External Trade Routes: Time to Take back What’s Ours International Experience Applying Various Systems to Build Operational Designs of Interest Rate Policy FX Interventions by CEE Central Banks: Lifebuoy Even for Those Who Can Swim European Integration and Scenarios of Accelerated Economic Growth in Ukraine.