Economic growth plunges to a two-year low in Q1

War fatigue drives below-trend expansion: According to a preliminary reading, at the outset of 2025, the economy felt the strain of protracted war, sanctions, elevated interest rates and sky-high inflation, with annual economic growth plummeting to 1.4% in the first quarter. The reading fell short of Q4 2024’s 4.5% expansion, undershot the pre-Covid growth 10-year average of 1.9% and was among the weakest in the post-pandemic era, barring contractions in the aftermath of Russia’s invasion of Ukraine.

Non-war economy weakens further: Absent a detailed breakdown, available monthly data suggests that the slowdown was broad-based in the non-war economy. On the production side, industrial output growth was the weakest since Q1 2023’s war-induced decline due to fresh declines in water supply and mining plus plummeting momentum in manufacturing. On the expenditure side, domestic demand likely remained subdued. Inflation averaged in the double digits for the first time in over two years, while nominal wage growth was around half of Q4 2024 levels in January–February. This, paired with historically elevated interest rates and persistent labor shortages, likely dented fixed investment and household spending; retail sales lost steam in Q1. On the external front, merchandise exports swung into contraction in Q1, depressed by recent Western sanctions on Russian oil, the country’s main export. Meanwhile, goods imports shrank, likely as a result of weaker domestic demand.

Economy to lose steam ahead; outlook contingent on peace talks: Our panelists expect the economy to regain slight momentum in the current quarter, though weaker oil prices denting government revenue and spending suggest downside risks to the prediction. Economic growth is then seen decelerating further in H2. As a result, our Consensus is for economic growth to more than halve from 2024 this year, dipping below the pre-pandemic 10-year average of 1.9%. War fatigue will outweigh the tailwinds from the war-related spending and investment that drove sturdy growth in 2023–2024. Drags will include elevated inflation and interest rates, labor shortages, sanctions and weaker export receipts. Still, the outlook hinges crucially on peace negotiations, which could imply some easing of trade restrictions and labor shortages.

Panelist insight: EIU analysts commented: “We forecast real GDP growth of 1.8% for full-year 2025. This falls short of the government's 2.5% target. Although peace talks may advance in the second half of 2025, any economic rebound will be constrained by structural issues. Domestic consumption will remain under pressure from high interest rates, while exports face continued challenges from sanctions and lower commodity prices. The combination of stagnant growth and high inflation will limit fiscal options and may force additional revenue-raising measures.”

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