Ukraine country report - October, 2023

October 2, 2023

Ukraine’s economy put in its first positive growth since the war began 19 months ago expanding by 19.5% in the second quarter of this year compared to the same period last year, according to Ukrstat's report on September 22.

This recovery is attributed to low base effects, as Ukraine's economy had suffered a severe contraction following Russia's invasion in February 2022.

The peak of the economic downturn occurred in the second quarter of last year, with a contraction of 37.2% y/y, surpassing the negative growth of -17% recorded during the second quarter of 2015, following the Euromaidan revolution.

When accounting for seasonal factors and putting aside the low base effects, the GDP for the second quarter of 2023 experienced an increase of 0.8% compared to the previous quarter. Over the past year, Ukraine's GDP faced significant challenges, resulting in an overall contraction of 29.1%, as reported by the State Statistics Service.

The near-term outlook is for more modest growth. The National Bank of Ukraine (NBU) adjusted its GDP growth forecast for the nation in 2023, raising it from 2% to a more optimistic 2.9%. However, the growth forecast for 2024 was slightly revised downward from 4.3% to 3.5%. The NBU anticipates second-quarter growth in 2023 of 18.1%.

The Ministry of Economy in Ukraine remains optimistic about the country's economic prospects, forecasting a GDP growth rate of 4% for 2023 and a further acceleration to 5% in the following year. This optimism is based on expectations of economic stabilization and containment of the conflict in the east and south of Ukraine.

The EU's embargo on Ukrainian grain imports came to an end on September 15, but Poland, Slovakia, and Hungary extended this embargo unilaterally due to the oversupply of cheap low-quality Ukrainian grain that caused the local grain prices to collapse.

Ukraine has made progress in gaining support from its five neighbouring EU countries for a joint verification and approval mechanism for grain supplies that was the compromise to restart grain shipments through Central Europe. Romania and Slovakia have embraced this grain trade system, lifting their bans.

The Rada also put through Ukraine’s 2024 budget with a significant boost to military spending that will now account for 20% of GDP. However, half of all the funding for the budget will come from donors.

Nevertheless, the government is optimistic thank to the improving macroeconomic situation, such as lower-than-expected inflation and a stronger hryvnia than were assumed in the 2023 state budget. Consumer inflation returned to a single-digit level for the first time in over two years, standing at 8.6%, largely due to a significant drop in vegetable prices.

The European Bank for Reconstruction and Development (EBRD) maintains its outlook for moderate growth in Ukraine's economy for 2023-2024. It expects a 1% GDP growth in 2023, followed by a 3% increase in 2024. The Ministry of Finance of Ukraine has also revised its GDP forecast positively for 2023, projecting growth of over 3%. Nevertheless, the challenges of trade imbalances, increasing imports, and potential external economic influences persist.

Negotiations for Ukraine's accession to the EU are set to begin in December, offering opportunities for benefits even before full membership. The European Parliament's President, Roberta Metsola, emphasizes the importance of preparing for Ukraine's membership and acknowledges Ukraine's progress in implementing the European Commission's recommendations.

The US avoided a shutdown by sacrificing aid to Ukraine. Both houses of the US Congress, the House of Representatives and the Senate, on the evening of September 30, supported a temporary budget resolution to finance federal spending for 45 days. The package does not contain new aid to Ukraine. T

However, Ukraine’s allies all promised that aid to Ukraine will not be cut off. The pentagon said it still has $5bn of funds left to aid Ukraine – enough for about six months. At the first Defence Forum in Kyiv at the end of September $100M investment from Baykar, 20 agreements with foreign partners, and the Alliance of Defence Industries. During the DFNC1 forum, representatives from Ukraine's military-industrial complex concluded 20 joint contracts with foreign partners to manufacture drones and to repair, and produce armoured vehicles and ammunition.

In particular, leading German weapons maker Rheinmetall has entered into a joint venture with Ukraine’s state-owned counterpart, the Ukraine Defence Industry group (UDI), to build facilities to make and repair weapons, Rheinmetall said on its website on September 29.

The Ukrainian Armed Forces' ongoing offensive campaign is rapidly approaching a critical weather-related limitation, according to statements made by US Chief of Staff, Mark Milley on September 10. Milley emphasized that the current offensive operation has approximately 30 to 45 days of combat effectiveness remaining before adverse weather conditions begin to impede their maneuverability. The counteroffensive has gone very slowly with neither side recapturing any significant amont of territory.

More Ukrainians are willing to stay abroad and the situation with Ukrainian refugees is not improving. According to the Center for Economic Strategy, a more active state policy for the return of citizens is needed. Between 1.3mn and 3.3mn Ukrainians may remain abroad.

Ukraine is bound to experience depopulation, labour shortages, and declining population density, particularly in certain regions, according to Ptoukha Institute for Demography and Social Studies.

As of the beginning of this year, Ukraine's population in areas controlled by Ukrainian authorities stood at 31.6mn, with a slight increase since then. However, the Ptoukha Institute projections for 2033 estimate Ukraine's population within its 1991 borders to range between 26mn and 35mn.

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