Ukraine: GDP declines at a softer pace in the first quarter
According to a preliminary estimate, GDP contracted at a slower pace of 10.5% year on year in the first quarter of 2023, improving from the 31.4% decline seen in the fourth quarter of last year.
Absent a sector-by-sector breakdown, the smaller drop in activity likely came on the back of a less-pronounced deterioration in the external sector, with merchandise exports declining 23.2% in Q1 (Q4: -43.4%). Moreover, improving consumer sentiment, softer price pressures and rebounding merchandise imports point to firming private spending. Nevertheless, Ukraine’s economy continued to be plagued by Russia’s invasion, remaining in contractionary territory.
Meanwhile, on a sequential basis, economic activity rebounded: GDP grew by 2.4% quarter on quarter in Q1, up from Q4 2022’s 4.7%.
Following Q1’s better-than-expected reading, the economy is now projected to bounce back in year-on-year terms from Q2 onwards. However, the outlook for the year ahead remains uncertain, and risks are skewed to the downside. With most industrial activity carried out in the eastern part of the country—which has faced some of the heaviest damage—manufacturing output will remain subdued. Agricultural production will also come under pressure from the war due to weaker plantings and an expected weaker harvest; the destruction of the Kakhovka dam in early June will likely dampen activity in the sector further. In addition, uncertainty over the Black Sea Grain Initiative will cap the recovery in exports. That said, a strong fiscal stimulus and ample foreign aid will support the economy this year.
Analysts at the EIU commented on the outlook:
“Steady external financial flows and the return of some business activities in western parts of the country explain why we do not expect another year of negative growth. However, the destruction of critical energy infrastructure, alongside continuing heavy hostilities in the south and east of the country, will represent a major drag on the economy. […] There is significant uncertainty attached to our forecast and the risk of another contraction in 2023, especially as Russia remains committed to inflicting serious damage on Ukraine’s economy.”