Ukraine: War-hit economy shrinks at a milder pace in Q3
According to a preliminary reading, GDP slid at a slower rate of 30.8% year on year in the third quarter, an improvement from the 37.2% contraction tallied in the second quarter.
Although a comprehensive sector-by-sector breakdown has not yet been released, the downturn will likely have been broad-based as a direct consequence of the full-scale invasion by Russia. Nevertheless, the launch of the Black Sea Grain Initiative on 22 July and the resumption of Ukrainian agricultural exports will have prevented a deeper slump.
Meanwhile, on a seasonally adjusted quarter-on-quarter basis, economic activity bounced back, growing 9.0% in Q3, contrasting the previous period’s 19.1% contraction.
In the last quarter of 2022, economic activity likely deteriorated sharply due to continuous air strikes on critical infrastructure and, particularly, damage to the energy grid. The Ministry of Economy estimated that the overall drop in GDP in 2022 was 30.4%. This was, nevertheless, an improvement from previous official projections given the strength of the country’s military defense, the speed of restoration of critical infrastructure and international financial aid.
In line with these estimates, 2022 would have seen a 30.4% drop in GDP—plus or minus 2%—which contrasted earlier expectations by the National Bank of Ukraine of minus 31.5% and FocusEconomics’ December Consensus Forecast of minus 33.4%.
The outlook ahead remains uncertain and contingent on the progression of the war. Current projections see the economy bouncing back in 2023, with the absence of a further security deterioration and ample foreign aid being key elements to recovery. In addition, rebuilding plans have been pushed back to H2 2023, which will likely continue to dampen growth prospects in the near term.
Analysts at the EIU commented:
“We expect a shallow recovery of 2.0% in 2023, primarily driven by financial support and a base effect. However, there is significant uncertainty attached to our forecast and the risk of a further contraction in 2023. Damage to critical infrastructure will hamper economic rebound even if areas that are relatively less affected by fighting. […] We do not forecast a recovery in private investment, as business sentiment among domestic and foreign firms will remain depressed, and economic activity will be driven mostly by fiscal expenditure, including on critical infrastructure repairs and social payments.”