NBU estimates Ukraine's GDP shrank 13.5% in Q1, expects 15.9% growth in Q2

MOSCOW. May 5 (Interfax) - The contraction of Ukraine's GDP slowed to 13.5% year-on-year in the first quarter of 2023 from 31.4% in the fourth quarter and 30.6% in the third quarter of 2022, Ukrainian media reported, citing the National Bank of Ukraine (NBU).

The NBU expects the economy to begin recovering in the second quarter, with GDP growing by 15.9% given the low base of the second quarter of 2022, when it dropped by 36.9%.

Growth will slow to 3.9% in the third quarter and 3.7% in the fourth quarter, and for the year real GDP will expand by 2% after shrinking by 29.1% in 2022, the NBU forecast.

These figures are significantly better than the NBU forecast in January, when year-on-year growth was forecast at 0.3%. At the time, the NBU expected GDP to shrink by 19.5% in the first quarter, and then grow by 11.7% in the second, 1.5% in the third and 8.2% in the fourth.

The NBU also improved its growth forecast for 2024 to 4.3% from 4.1%, and still expects growth to accelerate to 6.4% in 2025.

The baseline scenario assumes Ukraine's consistent compliance with obligations under the new cooperation program with the International Monetary Fund, the implementation of a coordinated monetary and fiscal policy, and gradual elimination of quasi-fiscal imbalances, including in the energy sector, the NBU said. It also assumes a significant decrease in security risks from the start of 2024, which will set the stage for fully unblocking seaports, reducing premiums for sovereign risk and the return of forced migrants, the NBU said.

The key risk for this forecast is a higher intensity and longer duration of the military activities, which could slow the economic recovery and worsen inflation and exchange rate expectations. This could lead to additional budget needs and significant quasi-fiscal deficits, including in the energy sector; problems with or the suspension of the so-called grain corridor; the exacerbation of problems related to restrictions on imports of Ukrainian food products by certain European countries; and the return of significant electricity shortages, which would limit economic activity and exports and lead to increased demand for imported equipment and energy resources and, consequently, foreign currency, the NBU said.

NBU estimates the probability of risks such as more intense emigration and imbalances in state finances (freeze on utility rates, reduction of international aid, monetary financing of the deficit), as well as a banking crisis in leading countries at 15-25%.

On the other hand, the NBU now estimates the probability of a new energy shortage due to damage to infrastructure at less than 15%, compared to 15-25% in its January report.