National Bank estimates Ukraine's Q2 GDP growth at 18.1%, expects it to slow to 4.6% in Q3

MOSCOW. Aug 4 (Interfax) - Ukraine's real GDP grew 18.1% year-on-year in Q2 2023 after falling 10.5% in Q1, Ukrainian media reported, citing the National Bank of Ukraine's an updated estimate, published in its July inflation report.

The NBU forecasts the economic recovery will slow to 4.6% in Q3 and 1.8% in Q4 2023, with a slight acceleration to 2.6%-2.2% in the first and second quarters of next year.

The National Bank said at the end of April that it expected GDP growth of 15.9% in Q2 this year and 3.9% and 3.7% in Q3 and Q4, respectively.

The NBU improved its forecast for Ukrainian economy's recovery this year as a whole to 2.9% from the 2% it was predicting in April, partly by adjusting the estimate for decline in Q1 from 13.5% to 10.5%, but it worsened the outlook for next year to 3.5% from 4.3%.

"The baseline scenario of the NBU's macroeconomic forecast assumes that Ukraine will consistently meet its commitments under the Extended Fund Facility with the IMF and pursue coordinated monetary and fiscal policies, and that quasi-fiscal imbalances will be gradually eliminated, in particular those in the energy sector. In addition, the baseline scenario assumes a significant decline in security risks from the middle of 2024, which would contribute to the complete unblocking of seaports, a decrease in sovereign risk premium, and the return of forced migrants to Ukraine," the NBU said.

In its previous inflation report, the NBU expected security risks to decrease from the beginning of 2024.

Despite this, the longer duration and intensity of the military operation in the country remains the key risk for the forecast, which could slow economic recovery and worsen inflation and exchange rate expectations, the National Bank said.

Other risks include international aid arriving in lower amounts or on a less regular basis and the resumption of significant power shortages because of the substantial damage which would restrain economic activity and exports, lead to stronger needs for imports and, consequently, to higher pressures on the FX market.

The NBU also pointed to risks of restrictions on export logistics; the emergence of additional budget needs and substantial quasi-fiscal deficits, including in the energy sector; and continued difficulties with exporting agricultural products.

The NBU estimated the probability of a protracted military operation and its escalation at 25% to 50%, as in the previous quarter.

As for the "grain corridor," which stopped working in June, although the National Bank estimated this probability at 25%-50%, it now gives it a 15%-25% chance of resuming. The NBU assesses at the same level the likelihood of the EU prolonging the ban on food supplies to certain European countries, which threatens additional losses of $500 million by the end of this year and a possible reduction in crop planting.

The National Bank estimates at 15%-25% the probability of increased emigration and an imbalance of public finances with the freezing of housing and utility charges, reduction of international assistance and monetary financing of the budget deficit.

As in April, the NBU estimates the likelihood of renewed energy shortages due to infrastructure damage at up to 15%.

The latest report, like the previous one, mentions such a factor as a "Marshall Plan," which can greatly influence and improve the macroeconomic outlook for Ukraine - the NBU still estimates the likelihood of this at 15%-25%.

Ukraine's real GDP shrank 29.1% in 2022, according to official statistics, after rising 3.4% in 2021.