OECD Economic Outlook, Volume 2023 Issue 2

Ukraine

The economy is stabilising. The business sector and the labour market have adapted to the war, with GDP growth expected to be positive, at 5% in 2023, 4% in 2024 and 4.5% in 2025. High levels of risk and uncertainty in the war economy hold back private investment, while exports are constrained by logistical issues. Inflation is declining, allowing a lowering of the key policy rate. The economy remains highly dependent on international financial assistance.

Macroeconomic policies should remain focussed on securing economic stability by avoiding excessive public deficits and achieving lower inflation. Structural policies should concentrate on improving the business environment to safeguard economic activity and employment, as well as secure stronger post-war growth and faster reconstruction.

Economic activity is reorganising

By mid-2023, growth had reached 2½ per cent (seasonally adjusted annual rate) as domestic demand picked up on the back of improved confidence and as the population and businesses adapted to the demands and constraints of the war. This economic stabilisation has encouraged a quarter of all refugees to return, helping to ease labour market shortages, as vacancies and hiring intentions continued to increase. At the same time, economic activity is being held back by more than USD 150 billion in estimated damages to buildings and infrastructure, and the disruption from the June destruction of the Kakhovka dam. This disrupted electricity and water supply and resulted in high humanitarian and ecological costs.

Ukraine: Inflation and labour market indicators

1. Expected changes in employment of industrial enterprises over the next 3 months.

Source: Central Bank of Ukraine; State Employment Service of Ukraine; and State Statistics Service of Ukraine.

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Ukraine: Demand, output and prices

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Domestic demand has picked up helped by a recovery in confidence on the back of declining inflation and stable foreign exchange markets, which has strengthened real incomes. In addition, the restoration of damaged housing and infrastructure together with the development of new transport logistics enabled a near 20% expansion of construction activity in the first half of 2023, along with a similar-sized increase in imports. Exports, on the other hand, decreased by nearly 18% (y-o-y) in the first nine months of 2023, reflecting logistical problems, particularly after the Russian cancellation of the Black Sea Grain Initiative in July and damages to alternative export facilities.

Macroeconomic policies are focussed on stabilisation

Inflation has moderated from 26% in January to 5.3% in October due to lower food and energy prices. Since June 2023, the National Bank has lowered its key policy rate by 900 basis points to 16%, and envisages returning to inflation targeting within a timeframe of 9-18 months. The first step – a move to a managed flexibility of the exchange rate – was introduced in the beginning of October 2023. Fiscal policy remains highly dependent on international financial assistance. In 2023, the public deficit is projected to reach 22.4% of GDP, with around 90% of this being covered by external financing. The public debt-to-GDP ratio is expected to surpass 90% in 2023, up from 49% in 2021.

The war economy is projected to strengthen amid large uncertainty

Economic activity is projected to pick up gradually over the projection period, as the completion of new transport logistics bolsters exports and as rising confidence translates into renewed private spending. Some sectors are expanding rapidly, such as the defence industry, but significantly higher private investments will only materialise after the cessation of hostilities. The most important downside risks are linked to the substantial uncertainty about the war, notably if massive attacks on energy infrastructure are repeated this winter or if disruptions in energy markets lead to a return to high energy prices. On the upside, a cessation of hostilities would release reconstruction spending.

Economic policies should focus on macroeconomic stability and the business environment

Macroeconomic policies should continue to stabilise the economy by avoiding excessive public deficits and lowering inflation. Monetary policy will have to remain restrictive until inflationary pressures are sufficiently controlled. Structural policies to bolster the business environment should include additional measures to strengthen the rule of law and the judiciary, which will further strengthen the anti‑corruption framework. This would also reduce the large informal sector, thereby benefiting the public finances and the fiscal sustainability of the pension system. Restoring the public finances will be difficult in a post-war setting, but nonetheless investments in key transport infrastructure will be essential to bolster exports and enable a shift to producing higher value-added goods.