Commentary of the National Bank on changes in real GDP in 2022


In 2022, real GDP decreased by 29.1%. This is evidenced by detailed GDP figures for 2022 published by the State Statistics Service of Ukraine.

This is the deepest annual decline of the economy in the entire history of Ukraine. The main reason for the fall in GDP was the full-scale war started by Russia on February 24, 2022, and its related consequences. It is, in particular, about the occupation of certain territories, the destruction of infrastructure and production facilities, the blockade of Black Sea ports and the severing of logistical connections, large-scale migration. The combination of these effects led to a sharp reduction in consumer demand, investment activity, exports and harvests.

The economy suffered the greatest losses in the first months of the full-scale war. Already in the first quarter of 2022, the decline of the economy reached 14.9%. This was a consequence not only of the full-scale invasion since February 24, but also of a significant increase in risks the day before, which negatively affected business and consumer sentiment. In the II quarter of 2022, real GDP decreased by 36.9% in annual terms. However, the military successes of the Armed Forces, as well as the anti-crisis measures of the NBU and the government with the support of international partners made it possible to gradually stabilize the macroeconomic situation. Ensuring smooth functioning of the banking and payment systems, fixing the official exchange rate while simultaneously introducing restrictions on currency exchange operations and capital movement were among those measures that restrained the spread of panic and significantly reduced uncertainty for the population and business. This laid the foundations for a revival of economic activity after the first shock of the war.

Already in the spring, the first signs of the recovery of economic activity appeared, which continued through the summer and early autumn. This was facilitated by the gradual improvement of logistics, the relocation of enterprises, the reorientation of a number of activities to military needs, the further liberation of occupied territories and the return of a part of internally displaced persons and forced migrants to their places of permanent residence, as well as the opening of the “grain corridor”. As a result, the fall in real GDP slowed to 30.6% year-on-year in the third quarter.

At the same time, at the end of the year, the recovery of the economy was interrupted due to the consequences of Russia’s large-scale attacks on the energy infrastructure, which led to a significant shortage of electricity in Ukraine. A significant part of enterprises adapted even to power supply interruptions by purchasing means of autonomous power supply, but worked at a lower capacity level. The rest of the business was not able to adapt to such conditions due to the peculiarities of production processes and limited financial resources. The shortage of electricity led to a deepening fall in GDP in the IV quarter – up to 31.4% in annual terms.

The actual fall in economic activity in 2022 was less than many organizations predicted at the start of the full-scale invasion, and better than the National Bank’s estimates published in Inflation report for January 2023. Better economic results compared to initial forecasts were due to a rapid increase in budget spending, primarily on defense and security, which supported public consumption and investment, as well as a faster adaptation of the population and business to wartime conditions, including energy supply disruptions at the end of the year.

Consumption in conditions of full-scale war decreased by 16.9%

The fall occurred primarily at the expense of private consumption, which is associated with a decrease in the income of the population in real terms and with record migration due to high security risks. As a result, the final expenses of households decreased by 26.7% at the end of the year.

At the same time, due to the rapid growth of expenditures on security and defense, social protection programs, as well as relatively stable financing of other budgetary areas (in particular, health care), public sector consumption as a whole increased by 18% over the year.

Also last year, final consumer spending of non-profit organizations serving households increased significantly (by 37.7%). This primarily reflects the rapid growth of the volunteer movement, as well as the work of other non-governmental public organizations.

High security risks and deteriorating business expectations led to a significant drop in investment activity

The gross accumulation of fixed capital in 2022 decreased by 34.3% y/y. In addition to security risks and deterioration of business expectations, the decline in investment activity was also influenced by the general deterioration of the financial results of enterprises.

At the same time, the supply of equipment and machinery for the needs of defense and security restrained the fall in investment.

Exports decreased sharply due to the disruption of logistics connections and Russia’s blockade of sea transportation, while the role of imported supplies increased

As a result of the destruction of the capacities of export-oriented enterprises and logistical difficulties due to Russia’s blockade of the Black Sea ports, the decline in exports deepened rapidly (up to 42.4%). The launch of the “grain corridor” and the development of transport routes across the western borders, including railways and Danube ports, only partially compensated for the limitations of traditional transport routes for export supplies.

In the conditions of a decrease in domestic production, the role of import supplies increased, although the volume of imports also decreased (by 18.5%) in response to the narrowing of domestic demand. The contribution of net exports to the change in GDP was negative (9.5 percentage points).

The indicators of most types of activity in 2022 significantly worsened

The dynamics of indicators of various types of activity during 2022 were primarily determined by high security risks.

The sector experienced the deepest decline construction due to a reduction in investment and a sharp decrease in demand for housing. At the same time, some support for the sector was provided by budget expenditures for infrastructure reconstruction.

As a result of the destruction of production facilities and infrastructure, the reduction of consumer and investment demand economic results industry also significantly worsened. Power outages at the end of the year due to Russian shelling of critical infrastructure deepened the decline in industrial production. At the same time, some types of processing industry, in particular machine building, light and food industry, were supported by state financing of military orders. The reorientation of agricultural producers to Ukrainian fertilizers in the conditions of the suspension of import supplies of fertilizers from the Russian Federation and Belarus supported the chemical industry, and the sustainable extraction of energy resources supported the mining industry.

Gross value added trade also significantly decreased. The decline was deep in other species as well services due to the rapid narrowing of consumer demand. Activity transport and wholesale trade were further restrained by logistical difficulties, reduced export supplies, fuel shortages in the spring of 2022, and power outages at the end of the year.

Occupation of territories and mining of cultivated areas, as well as a decrease in the yield of certain crops were the main reasons for a significant decrease in gross added value Agriculture. This type of activity was supported by the reorientation of a number of agricultural producers from grain crops to oil crops and the launch of the “grain corridor”.

Indicators decreased at a much lower rate compared to other types of activity financial sector thanks primarily to ensuring uninterrupted functioning of the banking system even in conditions of power outages. The fall in gross value added was also smaller IT industryboth thanks to the spread of remote work in this sector and the prompt relocation of IT enterprises to safer regions.

The gross added value increased rapidly public administration sector and defense given its growing role in full-scale war. Thanks to budget expenditures, financial indicators of sectors education and health care experienced lower rates of decline compared to many other directions. In general, the contribution of budgetary sectors to the change in real GDP was positive, unlike the impact of other industries. At the same time, the significant reduction of the tax base due to the drop in economic activity and the temporary introduction of tax benefits led to a significant reduction in taxes, which had a negative impact on GDP dynamics.

At the beginning of 2023, the economy returned to recovery thanks to a much better energy situation, further adjustment of business and population to the conditions of the war, and international support. It is expected that the economy will continue to pick up and in the current year it will be possible to avoid a fall in real GDP.

Among other things, the NBU’s measures to ensure macro-financial stability and the reduction of inflation, which will continue in the future, will contribute to the improvement of expectations. At the same time, economic recovery will remain subdued due to ongoing hostilities and high security risks.

These and other factors will be taken into account in the updated macroeconomic forecast of the National Bank of Ukraine, which will be released during the regular press briefing on monetary policy on April 27, 2023 and published in the Inflation Report on May 4, 2023.

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