Ukraine Economic Outlook
The economy should have shrunk at a steeper annual pace in Q4 due to Russia’s attacks on energy infrastructure. Business activity and industrial output were decimated by electricity shortages, while infrastructure repairs, agricultural exports and foreign aid likely prevented a steeper slump. In Q1 2023, annual GDP is likely contracting for the fifth consecutive quarter but at a milder pace. In February, the National Bank of Ukraine’s business activity expectations index improved notably thanks to reviving activity in most sectors. That said, power shortages, higher production costs of alternative energy sources and dull domestic demand are hindering activity. Meanwhile, Turkey is seeking to extend the Black Sea Grain Deal past its 18 March expiration date. In addition, on 2 March, the U.S. announced new partnerships amounting to USD 44 million supporting Ukraine’s agricultural sector.
Inflation eased to 26.0% in January on softer food and transport price pressures (December: 26.6%). In 2023, lower commodity prices, lackluster domestic demand and a restrictive monetary policy stance should see the headline rate cool from current levels. However, average inflation will exceed the Central Bank’s 5.0% target this year due to spillovers from the war.