The National Bank predicts a significant decrease in inflation and the return of the economy to recovery this year – Inflation Report


In 2023, inflation will slow to 14.8% and real GDP will grow by 2%. In the following years, inflation will continue to decrease, and the recovery of the economy will accelerate against the background of a reduction in security risks embedded in the forecast. This is reported in the quarterly Inflation report for April 2023.

Inflation will decrease over the entire forecast horizon

Under the influence of tight monetary conditions, a decrease in world inflation and restrained domestic demand, inflation in Ukraine will slow down to 14.8% this year. A sharp decrease in inflation is expected, in particular, in the first half of the current year. In the second half of the year, the rate of growth of consumer prices will remain at an almost unchanged level mainly due to the uneven basis of comparison and the announced return of fuel taxes in order to reduce the pressure on public finances.

Inflation will slow down to 9.6% next year, and to 6% in 2025. Taking into account the assumption of a decrease in security risks from the beginning of 2024, embedded in the forecast, the further restoration of logistics and production capacities and the consistent monetary policy of the NBU, inflationary pressure will weaken, despite the revival of the economy and the preservation of a soft fiscal policy.

Monetary conditions will remain fairly tight for a long time even with a reduction in the discount rate from the 4th quarter of 2023. This is caused by the expected slowdown in inflation and the corresponding increase in the real yield of hryvnia instruments. A consistent monetary policy aimed at maintaining the attractiveness of hryvnia savings will make it possible to maintain exchange rate stability, including at the stage of easing currency restrictions.

Thanks to the stability of the energy system and significant fiscal incentives, the economy will return to recovery this year

In view of the rapid restoration of the energy system and the increase in the amount of expected international aid (which will flow into the economy through the budget and support private consumption and investment activity), the National Bank has improved the GDP growth forecast in 2023 – from a marginal 0.3% to 2.0%. A more rapid economic recovery will be hindered by persistently high security risks that dampen investment and consumer sentiment, logistical constraints for exports, and weak rates of return of forced migrants from abroad.

In 2024 and 2025, economic growth rates are expected to accelerate to 4.3% and 6.4%, respectively, primarily thanks to the forecast reduction of security risks and still soft fiscal policy, despite some consolidation.

Employment and wages will gradually rise as the economy recovers, but unemployment will remain higher than pre-war levels

Provided there are no new significant shocks, the recovery of the labor market will continue in 2023-2025 against the background of economic growth and a fairly soft fiscal policy. The unemployment rate will gradually decrease: in 2023 – to 18.3%, in 2024 – to 16.5%, and in 2025 – to 14.7%. However, it will exceed the pre-war level, particularly given the likely persistence of significant qualification and regional disparities in the labor market.

Real wages will return to growth, which will however be moderate this year (3.7%) due to still high inflation. Instead, nominal wages will grow at double-digit rates over the entire forecast horizon. After the reduction of security risks and the full opening of borders, a significant part of businesses will have to compete for workers, including with foreign employers, which will be a significant factor for further wage growth.

International aid will continue to play a key role in financing budgetary needs, but the role of domestic borrowing will increase

Given the significant costs of ensuring defense capability and the limited resource base due to the consequences of the war, the budget deficit will expand to more than 26% of GDP in 2023. In the future, a gradual narrowing of the budget deficit is expected. However, fiscal policy will remain accommodative throughout the forecast horizon, which is particularly important for sustaining the post-war economic recovery.

International financial aid will remain the main source of financing the significant budget deficit this year. At the same time, the role of borrowing on the domestic debt market will grow, including due to the increase in the attractiveness of government securities against the background of a decrease in the risk premium and inflation. All this will make it possible not to resort to monetary financing in the future, as was declared by the government and the NBU.

Despite the high level of debt on the forecast horizon, the debt burden in the coming years will be relatively moderate thanks to favorable conditions for attracting new loans.

The main assumption of this macro forecast is a significant reduction of security risks from the beginning of 2024 thanks to the successful actions of the Ukrainian army

Accordingly, the most significant risk to the current forecast is a higher intensity and longer duration of full-scale war. Under such a scenario, economic growth will be limited to 2% in 2024, despite the adjustment of business to conditions of high security risks, which will slow down the recovery of the labor market as a result. Inflation will be restrained by the extension of the moratorium on tariff increases for certain housing and communal services, but will significantly accelerate after its cancellation. Monetary conditions in the case of the implementation of the scenario of a longer war will be tough for a longer period.

On the other hand, a positive risk for the forecast is the rapid implementation of the reconstruction project of Ukraine, which, together with the European integration reforms, will make it possible to significantly accelerate the rate of economic growth, and accordingly, reduce unemployment and increase incomes. The latter will not have significant pro-inflationary effects, as the price pressure will be leveled by a favorable situation on the foreign exchange market due to the inflow of currency into the country and the reduction of the risk premium. Under the implementation of such a scenario, the NBU, on the contrary, can soften the monetary policy faster than the current forecast predicts.

In addition to updated macroeconomic forecasts, the April Inflation Report covered a number of special topics, including:

  • Natural gas prices on the European market: the time of the downward trend

Threats of partial or complete cessation of gas supply to EU countries by Russia led to a rapid increase in its value on the European market. However, it was possible to compensate for the loss of supplies through Russian pipelines thanks to the significant accumulated gas reserves in the EU (more than 90% of the storages were filled at the beginning of the heating season), record imports of liquefied natural gas (LNG) and a significant drop in demand for it (by 15% in 2022). against the background of a warm winter. Therefore, gas blackmail from Russia could not provoke an energy crisis in the EU. Instead, it accelerated the formation of a European gas market with a full-fledged pricing mechanism and competition.

Currently, this market is still vulnerable to Russian supplies, whose share, despite the reduction, was about 15% of all EU imports in the 1st quarter of 2023. Competition from Asian countries for LNG will put additional pressure on the market, despite the increase in its production in the world. As a result, risks of high price volatility will remain, keeping them at a higher level than until 2022. At the same time, the laid foundation of structural changes makes it possible to expect a steady decrease in gas prices on the European market in the coming years.

  • The impact of including a fee for living in one’s own home on inflation

At the beginning of 2022, the State Statistics Service of Ukraine systematically reviewed the consumer set for calculating the Consumer Price Index (CPI) with the aim of further approximating it to the actual expenditures of the population and bringing national statistics to international standards. One of the key innovations is the inclusion of fees for living in one’s own home (that is, expenses accompanying the purchase of housing, as well as incurred for the maintenance and living in housing), which was previously only partially taken into account.

So far, such changes have not had a significant impact on the inflation indicator, despite the high rates of price growth in this group. This is due to the small share of own housing costs in the CPI (only 0.43% in 2023). However, as evidenced by data from other countries, the weight and impact of this component on overall inflation indicators may increase significantly, taking into account the expected post-war recovery of the economy, as well as the accompanying development of the real estate and mortgage lending markets. Therefore, the inclusion of the payment for one’s own housing in the calculation of the CPI will contribute to the adoption of more informative decisions on monetary policy.

  • Assessing the accuracy of the NBU’s macroeconomic forecasts

The quality of the NBU’s macroeconomic forecasts remains equal to or better than the average forecasts of market participants. In particular, the accuracy of inflation forecasts for 2016–2022 was higher than average, and among unadjusted inflation forecast errors, it was the highest compared to other forecasts. The accuracy of NBU forecasts regarding the discount rate is traditionally higher than that of other market participants. Forecast errors, despite the unprecedented uncertainty, were relatively insignificant and were mostly explained by unexpected shocks, as well as the conservatism of the scenario assumptions embedded in the forecast, traditional for central banks.

  • The labor market in Ukraine during a full-scale war

Estimating the impact of a full-scale war on the labor market is difficult in the absence of relevant official statistics and requires additional research methods. Such were the data and results of a number of population surveys.

On the basis of these data, the NBU clarified the estimate of the level of unemployment in 2022. In addition, using probit models, the NBU estimated the probability of acquiring the status of unemployed depending on socio-demographic characteristics. The most important of them, according to the results of the calculations, were age, place of residence, level of education and region of residence. A direct effect of a full-scale invasion is an increase in the probability of becoming unemployed in all regions of Ukraine. Instead, the liberation of the territories had a direct and tangible effect on reducing this probability.

Alternative assessments of the labor market confirmed not only a significant increase in unemployment in Ukraine after the full-scale invasion, but also positive dynamics in the labor market in the second half of the year. Based on the received data, the NBU improved the estimate of unemployment in 2022 to 21.1% (from 25.8%).

  • Factors of stability of Ukrainian exports during a full-scale war

The full-scale invasion of the Russian Federation in 2022 created unprecedented challenges for Ukrainian manufacturers and exporters. In addition to significant destruction of production and storage facilities, security risks and uncertainty, the blockade of sea transport routes (which accounted for about two-thirds of Ukraine’s foreign trade turnover in peacetime) was an unprecedented blow.

At the same time, food exports demonstrated resilience even in the face of full-scale war. In March–December 2022, it decreased less (by 27%) than supplies of other goods, mitigating the fall in total exports (45%). Moreover, in 2022, Ukraine remained among the top five global exporters of agricultural products and even diversified its exports to individual markets.

Food exports will continue to provide a solid foundation for the Ukrainian economy, including in the period of post-war recovery, thanks to established supply routes, product recognition for European consumers and better adaptation of Ukrainian products to EU requirements. At the same time, an important task for increasing the competitiveness of Ukrainian exports in the long term is to increase the share of high-tech products in it.

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