NBU estimates Ukraine's GDP growth at 6.5% in Q4 2023, expects it to accelerate to 7.1% in Q1 2024

MOSCOW. Feb 5 (Interfax) - The National Bank of Ukraine (NBU) has estimated Ukraine's real gross domestic product (GDP) growth at 6.5% in the fourth quarter of 2023 year-on-year, which is worse than 9.3% in the third quarter but better than the NBU's previous forecast of 4.5%.

"Growth has resumed across the vast majority of economic activities. The recovery was more rapid than the NBU's preliminary forecast expected. This was facilitated, above all, by a large harvest of late crops, as well as higher resilience of the population and businesses to crisis conditions," Ukrainian media quoted the NBU's inflation report on its website.

The situation in the energy sector at the end of 2023 is cited as an example of adaptability: according to the NBU's estimates, the electricity shortage in Q4 amounted to around 3%, which is less than previous expectations. In addition, it was mostly local and almost fully made up for by imports of electricity, so it did not have an additional negative impact on economic activity.

While noting the overall positive impact of the unexpectedly high harvest on GDP growth estimates for 2023 as a whole to 5.7% from 4.9%, the NBU noted that the shift of the active harvest campaign to early fall 2023 was one of the factors behind a certain slowing of real GDP growth in Q4.

The NBU added that very mild fiscal policy stimulated a recovery in both consumer and investment demand for the second year in a row. The fiscal impetus was particularly substantial at the end of 2023, and its effects will be seen at the beginning of this year, as well, the regulator said. According to its estimate, the consolidated budget deficit for the whole year reached a record high of over UAH 1,760 billion without taking into account grants in revenue or 27% of GDP (it was 25.3% of GDP in 2022).

At the same time, the year-on-year growth of budget capital expenditures slowed in the fourth quarter, which was another factor behind the slowing of real GDP growth at the end of the year, the NBU said.

The NBU also noted as a new positive factor the expansion of the maritime corridor, its broader assortment of goods, which ensured the growth of exports not only of certain food products, as in the case of the grain corridor, but also of products of the mining and metallurgical industry. As a result, the negative contribution of net exports to real GDP growth in Q4 2023, according to NBU's estimates, diminished.

"The operation of the new sea route will provide the agricultural sector with the logistics capacity required for the export of crops harvested in 2023-2024, and will contribute to the gradual increase in export deliveries of mining and metallurgical products. Average monthly shipments of goods through the sea corridor are expected to reach around 7 million tonnes in 2024, of which 4 million tonnes will be foodstuffs. This will support agriculture, industrial activities, transportation and wholesale trade," the NBU said.

At the same time, still high security risks will restrain economic growth this year, while the severity of loss and destruction will be seen throughout the forecast horizon, the NBU noted, projecting GDP growth to slow to 3.6% in 2024.

It added that agriculture will generate an additional negative contribution to real GDP growth in 2024 due to an expected decline in the harvest. This will constrain the potential for exports.

The NBU assumed that certain import restrictions at the external border will persist in February-March, causing the country to lose $100 million monthly at that time, compared to $150 million-$200 million in January and $500 million at the end of 2023.

According to the inflation report, the NBU expects economic recovery to accelerate to 7.1% in Q1 2024 (5.4% was expected in the previous report), followed by the slowing to 4.8% in Q2 (3.5% was previously expected).

At the same time, the NBU estimates that growth will slow down to 1.7% and 2% in the third and fourth quarters of this year, respectively.

As reported, the NBU in January slightly downgraded its forecast for 2025 from 6.0% to 5.8% and expects it to slow down to 4.5% in 2026.

The key risk to the forecast remains the longer term and intensity of the crisis, the regulator said.

In the updated report, the NBU also raised from 15%-25% to 25%-50% the probability of the risk of a drop in the volume and loss of pace of international aid payments, which could threaten the resumption of the National Bank's emission financing of the budget. The level of influence of this risk, according to the report, is as high as the protraction of the crisis.

With a probability of about 25% and 50%, the NBU also estimates the risk of significant damage to energy and port infrastructure, as well as the risk of continued partial blocking of cargo traffic across the border by individual EU countries, but the impact of these risks, according to the Central Bank, is lower, namely moderate and weak, respectively.

The probability of the risk of additional budget needs and substantial quasi-fiscal deficits in the updated report remained at 15%-25%, as well as the strong degree of its impact on the macro outlook.

Among the positive risks with a probability of about 15%-25% are the development of the sea corridor and the rapid implementation of the Marshall Plan (for Ukraine) with a moderate and strong impact on the macro outlook, respectively.

The official exchange rate as of February 5 is 37.57 UAH/$1.