War fatigue pushes economic growth to a two-year low in Q1

War fatigue pushes economic growth to a two-year low in Q1

Second release reveals steeper slowdown:

Second release reveals steeper slowdown: The economy shifted into a lower gear at the outset of 2025, with the mounting strain from prolonged war, sanctions plus sky-high interest rates and inflation pushing annual GDP growth to 1.4% in Q1. The result was below a 1.5% initial estimate and Q4 2024’s 4.5% print, marking one of the weakest expansions in the post-pandemic era, barring contractions in the aftermath of Russia’s invasion of Ukraine in 2022. On a seasonally adjusted quarter-on-quarter basis, economic activity contracted 0.6% in Q1, contrasting the previous quarter's 1.1% gain.

The economy shifted into a lower gear at the outset of 2025, with the mounting strain from prolonged war, sanctions plus sky-high interest rates and inflation pushing annual GDP growth to 1.4% in Q1. The result was below a 1.5% initial estimate and Q4 2024’s 4.5% print, marking one of the weakest expansions in the post-pandemic era, barring contractions in the aftermath of Russia’s invasion of Ukraine in 2022. On a seasonally adjusted quarter-on-quarter basis, economic activity contracted 0.6% in Q1, contrasting the previous quarter's 1.1% gain.

Sanctions, gas deal termination and weak purchasing power pose strong headwinds:

Sanctions, gas deal termination and weak purchasing power pose strong headwinds: The services and industrial sectors—together over 95% of GDP—were major drags on momentum. The tertiary sector felt the pinch of a sharper decline in real wages, historically elevated interest rates and persistent labor shortages: Domestic trade shrank 0.1% in Q1 (Q4 2024: +4.9% yoy), its first drop in two years. Moreover, public administration rose at a softer pace of 6.8% in Q1 (Q4 2024: +7.8% yoy)—albeit still outpacing the pre-invasion decade average—hinting at cooling wartime spending and investment that had driven sturdy GDP growth in 2023–2024. Meanwhile, momentum in industry ground to a near halt in Q1. Energy output contracted 3.8%, deteriorating from the prior quarter's 0.6% fall, while manufacturing growth more than halved to 4.5% (Q4 2024: +9.5% yoy). Industrial downturn reflected mounting sanctions on hydrocarbons—the country’s top export—plus the expiration of a Russia-Ukraine gas supply contract in January. Still, construction activity increased by 7.3% in Q1 (Q4: +2.9% yoy), cushioning the slowdown. More positively, the agricultural sector returned to growth, expanding 1.1% in the first quarter after the prior quarter’s 8.9% decline; in Q1. The rebound was likely supported by China’s decision to raise duties on Canadian and U.S. agricultural products, stepping up its imports of Russian crops in turn.

The services and industrial sectors—together over 95% of GDP—were major drags on momentum. The tertiary sector felt the pinch of a sharper decline in real wages, historically elevated interest rates and persistent labor shortages: Domestic trade shrank 0.1% in Q1 (Q4 2024: +4.9% yoy), its first drop in two years. Moreover, public administration rose at a softer pace of 6.8% in Q1 (Q4 2024: +7.8% yoy)—albeit still outpacing the pre-invasion decade average—hinting at cooling wartime spending and investment that had driven sturdy GDP growth in 2023–2024. Meanwhile, momentum in industry ground to a near halt in Q1. Energy output contracted 3.8%, deteriorating from the prior quarter's 0.6% fall, while manufacturing growth more than halved to 4.5% (Q4 2024: +9.5% yoy). Industrial downturn reflected mounting sanctions on hydrocarbons—the country’s top export—plus the expiration of a Russia-Ukraine gas supply contract in January. Still, construction activity increased by 7.3% in Q1 (Q4: +2.9% yoy), cushioning the slowdown. More positively, the agricultural sector returned to growth, expanding 1.1% in the first quarter after the prior quarter’s 8.9% decline; in Q1. The rebound was likely supported by China’s decision to raise duties on Canadian and U.S. agricultural products, stepping up its imports of Russian crops in turn.

Economy to lose steam in 2025:

Economy to lose steam in 2025: Our panelists have penciled in another subdued growth print for Q2 and see momentum easing further in H2. Elevated interest rates and inflation, paired with subdued wage growth and labor shortages, should dent household budgets. Moreover, sanctions plus plunging oil prices should hit export revenues and government spending in turn. Meanwhile, easing trade tensions between China and the U.S. could drag on agricultural exports. Overall in 2025, our Consensus is for economic growth to more than halve from 2024, dipping below the pre-pandemic 10-year average of 1.9%. Oil prices, the health of the construction sector plus peace negotiations will be key to track; a peace deal could imply some easing of trade restrictions and labor shortages.

Our panelists have penciled in another subdued growth print for Q2 and see momentum easing further in H2. Elevated interest rates and inflation, paired with subdued wage growth and labor shortages, should dent household budgets. Moreover, sanctions plus plunging oil prices should hit export revenues and government spending in turn. Meanwhile, easing trade tensions between China and the U.S. could drag on agricultural exports. Overall in 2025, our Consensus is for economic growth to more than halve from 2024, dipping below the pre-pandemic 10-year average of 1.9%. Oil prices, the health of the construction sector plus peace negotiations will be key to track; a peace deal could imply some easing of trade restrictions and labor shortages.

Consensus Forecasts and Projections for the next ten years

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