By KYIV. Nov 6 (Interfax-Ukraine) – The growth of real gross domestic product (GDP) of Ukraine in the third quarter of 2023 compared to the same period last year slowed down not to 4.6%, but to 8.2% from 19.5% in the second quarter, such an updated The National Bank of Ukraine published the assessment in its Inflation Report on its website.
“A significant factor in the better dynamics was the higher yields of the major crops than in the past due to extremely favorable weather conditions. Thus, the yield of early grains not only exceeded the previous year, but also the record year of 2021, while the sown areas of most crops remained almost at the level of the previous year,” the NBU said in the report.
The NBU, which overall raised its GDP growth forecast for this year from 2.9% to 4.9%, estimates the direct positive contribution of the higher harvest at 1.3 percentage points.
According to the report, in the fourth quarter of 2023, the National Bank expects the economic recovery to slow down to 4.5%, followed by an acceleration in the first quarter of next year to 5.4% and a slowdown again in the second to 3.5%.
At the end of July, in the previous Inflation Report, the National Bank expected a slowdown in GDP growth to 1.8% in the fourth quarter of this year, with a slight acceleration to 2.6-2.2% in the first and second quarters of next year.
As reported, the NBU, together with the reduction of the key policy rate in October from 20% per annum to 16% while maintaining the working rates for transactions with banks, slightly improved the forecast for economic recovery in Ukraine next year – from 3.5% to 3.6%, reducing it by 2025 from 6.8% to 6%.
“The baseline scenario of this macro forecast is based on a more conservative assumption than in previous forecasts: high security risks are expected to continue until the end of 2024. A longer and higher intensity of the war than in the baseline scenario will worsen the prospects for economic recovery in Ukraine and will cause additional losses of development potential, will hinder a more active return of migrants. Accordingly, both productive assets and the labor market will recover more slowly,” the National Bank said.
In this regard, business confidence is expected to be worse than in the baseline forecast, which, in turn, will restrain investment activity and limit supply.
According to the regulator, the key risk for the forecast remains the longer duration and intensity of the war, and the likelihood of eco-terrorism on the part of the occupiers.
The National Bank added that compared to the second quarter, the risk of significant damage to the energy and port infrastructure has increased significantly – from less than 15% to 25-50%, which is fraught with a decrease in economic activity and complication of the export of agricultural products.
The latter factor may cause a reduction in foreign exchange earnings, as well as an increase in the need for significant investments to resume exports.
According to the National Bank’s expectations, exports will remain limited longer than expected, which will create additional pressure on the foreign exchange market and, as a result, on price dynamics.
“Consequently, to maintain moderate inflation, the NBU may resort to a tighter monetary policy than the baseline scenario of this forecast assumes,” the regulator said.
In the updated report, the NBU identified as a separate risk a decrease in the volume and loss of rhythm of international assistance receipts, which may threaten the resumption of emission financing of the budget by the NBU, as well as the risk of additional budget needs and significant quasi-fiscal deficits. The NBU estimates its probability at 15-25%, and the degree of influence on the macro forecast as strong.
The continuation of the moratorium on increasing tariffs for certain housing and communal services in the conditions of a prolonged war will only partially compensate for the impact of these pro-inflationary factors.
The National Bank said that delaying decisions to bring tariffs for housing and utility services to economically justified levels could lead to the accumulation of quasi-fiscal deficits and a deterioration in the financial position of state-owned energy companies.
“This, in turn, will threaten instability in the energy market and a decrease in the investment potential of this industry,” the regulator said.
The NBU added that, on the other hand, an accelerated increase in energy costs could create additional inflationary pressure, social tension and provoke the need for a significant increase in subsidies for the population.
In this report, as in the previous one, there is a mention of such a factor as the Marshall Plan, which can greatly influence and improve the macro forecast, and the central bank kept its probability at 15-25%.
