Ukraine: Economy rebounds in the first quarter
Economy rebounds shallowly in Q1: Recently released data revealed that the economy bounced back in the first quarter of 2025, with GDP expanding 0.9% on an annual basis (Q4 2024: -0.1% yoy). The expansion came in short of market expectations but exceeded the National Bank of Ukraine’s 0.5% forecast.
On a seasonally adjusted quarter-on-quarter basis, economic growth improved to 0.7% in Q1 from the previous period’s 0.2%, marking the best result since Q1 2024.
Stronger domestic demand leads recovery: The rebound in the economy in annual terms stemmed from improvements in public spending and fixed investment, which fueled stronger growth in domestic demand. Government consumption recovered, growing 6.6% in Q1 (Q4 2024: -2.8% yoy). Fixed investment growth picked up to 37.7% in Q1, following the 9.5% increase recorded in the prior quarter. Less positively, private consumption growth slowed to 1.6% in Q1 compared to a 4.2% expansion in Q4.
On the external front, exports of goods and services fell 17.8% in the first quarter, which contrasted the fourth quarter’s 8.5% expansion and was likely due to faltering agricultural shipments as Ukraine grappled with low inventories and adverse weather conditions. Meanwhile, imports of goods and services growth eased to 8.7% in Q1 (Q4 2024: +8.9% yoy).
GDP growth to accelerate but downside risks persist: GDP growth should continue to regain speed in the remainder of 2025 as the economy continues to adapt to the war. However, momentum will still remain subdued considering 2024’s low base of comparison. The protracted invasion by Russia and elevated interest rates for most of the year will weigh on domestic activity, and a weak harvest and soaring imports to meet war needs will weigh on the external sector’s performance.
The outlook for Ukraine’s economy remains contingent on the course of the war; stalling peace talks, an unfavorable peace treaty and further attacks on critical infrastructure pose key downside risks. Additionally, uncertain inflows of foreign aid from the U.S. under Donald Trump’s presidency cloud the outlook further.
Panelist insight: EIU analysts commented on the outlook:
“With the war continuing, and extensive strikes on infrastructure likely to remain a feature through the year, we expect that growth will slow slightly in 2025, to 2.7% from 2.9% in 2024. […] High nominal wages amid labour shortages will continue to sustain a robust level of domestic demand, although growth in private consumption will probably be weaker in 2025 as inflation eats into real wage growth. Both consumption and the need to purchase war supplies will also drive robust demand for imports, and we expect net exports to act as a drag on the economy for the full year. Tighter monetary policy will also dampen growth and is likely to extend into the second half of 2025, with inflation remaining stubbornly high.“
Goldman Sachs’ Andrew Matheny and Johan Allen said:
“All in all, while [Q1’s] print was an upside surprise relative to our expectations, we expect this to be offset by further sluggish growth in upcoming quarters, mainly reflecting the continuation of Russian attacks on Ukrainian infrastructure. We therefore maintain our forecast for +2.0% growth in 2025. That said, like our inflation forecast, this is highly conditional on the outturn of the autumn harvest and reflecting this, we view risks as being two-sided.”