EU lowers Ukraine growth forecast to 2.9%, inflation forecast to 5.5% for 2024
MOSCOW. May 16 (Interfax) - Ukraine's economic growth will slow to 2.9% this year from 5.3% in 2023 and subsequently accelerate to 5.9% in 2025, Ukrainian media reported, citing the European Commission's forecast published on its website.
Tentative estimates indicate that Ukraine has lost 30% to 40% of its energy generating capacity since the beginning of 2024, and the labor shortage in the country will have a negative impact on economic output, the forecast said.
The EC projected in its fall forecast that Ukrainian economic growth would slow to 3.7% this year and accelerate to 6.1% next year.
The better outlook for 2025 is based on the assumption that conditions for a gradual increase in early reconstruction efforts will be in place from early 2025, the EC said.
In 2024, the EC expects the growth of private consumption to slow due to dampened consumer sentiment, but still become the main driver, supported by slowing inflation, strong wage growth reflecting acute labor shortages and a decrease in the unemployment rate.
Heightened uncertainty will continue to curb overall private investment growth, the EC expects.
The EC raised its growth forecast for Ukraine's exports to 6% for this year from 3.3% in the fall report. However, the country will continue to have a trade deficit given its large import needs.
"This forecast is of course subject to particularly high uncertainty, with risks largely tilted to the downside," the EC said, remarking that an escalation of the conflict could "add to the already high input costs and lead to further loss of production capacity."
Ukraine's labor market has seen some signs of stabilization since 2023 amid lower net migration outflows and the partial return of internally displaced persons, but the still high number of displaced persons, both abroad and within the country, will probably continue to disrupt the labor market and contribute to mismatches across regions and sectors, the EC said.
The EC has improved its forecast for the unemployment rate to 15.5% this year and 14.1% in 2025 from 16.2% and 14.5%, respectively, in the fall report.
Growing labor costs, supply disruptions, the recovery of domestic demand and heavy spending on defense are expected to keep inflation at a high level in 2024 and 2025.
The EC now expects average annual inflation to slow to 5.5% this year from 12.8% in 2023, and then accelerate to 7.8% in 2025, while in its fall forecast it projected inflation of 7.7% this year and 7.6% next year.
Ukraine's state budget deficit will remain high, but is expected to gradually decrease from 19.7% of GDP last year to 17.7% of GDP in 2024 and 8.7% of GDP in 2025, in part thanks to measures such as the tax on extraordinary profits in the banking sector (1% of GDP) and the expiration of the tax reduction on fuel and tobacco (1.6% of GDP), as well as the continued economic recovery.
In light of the lower budget deficit forecast, the projection for the growth of the state debt has also improved. The EC now expects it to grow to 94.4% of GDP this year and to 97.8% of GDP in 2025, while the fall forecast projected figures of 96.2% and 98.3%, respectively.
Given Ukraine's large financing needs and the increased use of domestic financing at elevated rates, the public debt is projected to increase further, albeit at a slowing pace and remaining below the threshold of 100% of GDP, the EC said.