At the same time, inflation will remain high, and the exchange rate of the hryvnia will continue to decline at nearly the same pace as this year. The reasons for this are discussed by “Minfin”. This information is reported by Kontrakty.UA.
The economy will continue to recover slowly
According to preliminary estimates, Ukraine's GDP has increased by 4% this year. This indicates that our economy has been growing for two consecutive years, although in 2024 it is expected to grow more slowly than last year. In 2023, the economy grew by 5.3%. This was largely due to a low comparative base, as in the first year of the full-scale invasion, GDP plummeted by 29.1%, and we are currently witnessing only its gradual recovery.
Both state and international institutions, as well as financial companies and banks, expect that next year Ukraine's GDP will maintain this trend. According to calculations made by the government while preparing the 2025 budget, the economy is projected to grow by 2.7% next year, while the National Bank offers a more optimistic forecast of 4.3%.
Overall, according to the consensus forecast prepared by “Minfin” based on the projections of twelve institutions, GDP growth next year will be 3.42%. The highest forecast comes from Raiffeisen Bank at 4.9%, while Capital Times has the most pessimistic view, expecting growth of only 2.5%.
Factors affecting GDP
As in previous years, the key factor influencing the country's economy will be the situation at the front. According to the International Monetary Fund's baseline scenario, Russia's war against Ukraine will end by the end of 2025, while the pessimistic scenario suggests it may continue until mid-2026.
“Next year will be a year of great hopes and expectations for a sustainable ceasefire and improvement in the security situation. The newly elected U.S. President Donald Trump has yet to disclose details of his peace plan, and it is unlikely to happen before his inauguration.
The enormous human and economic losses make negotiations for a ceasefire unavoidable. However, we do not expect any agreement to be reached in any format in the near future. In our opinion, for most of the year, the Ukrainian economy will operate under the existing security conditions,” says Vitaliy Vavryshchuk, head of the macroeconomic research department at ICU Group.
Experts from Altbank informed “Minfin” that, according to their baseline scenario, the war will either continue or be put on a short pause next year.
Amid the ongoing hostilities, analysts at Dragon Capital expect a development of the defense industry, partly due to international assistance. According to specialists' rough estimates, this sector could contribute 1-2 percentage points to GDP next year, compared to 0.4 percentage points in 2023. However, this will only happen if there is a significant increase in funding.
The Ukrainian budget will remain dependent on international financial assistance, but the agreements already reached will be sufficient for its financing. “The government can count on $38 billion in external funding for the budget deficit in 2025, the same level as this year,” states Dragon Capital’s forecast.
The government also exudes confidence regarding budget financing. According to Prime Minister Denys Shmyhal, Ukraine will finish 2024 under conditions of financial stability, and the government is confident in covering necessary expenses next year. “Through taxes, fees, and internal loans, we fully finance our Defense Forces. Thanks to our partners, we cover civilian expenses,” he emphasized.
As the IMF notes, the economic effects of the electricity deficit in winter may be less severe than previously expected. This is linked to business investments in their own generating capacities, increased import potential from Europe, and efforts to repair and establish additional generating capacities and distribution networks.
According to Capital Times, the main drivers of economic growth will remain the public sector and the agricultural sector, which will particularly benefit from the establishment of logistical routes. According to preliminary estimates from the Ministry of Agrarian Policy, the total export of agricultural products this year will amount to $24.5 billion, making it the second-best performance since Ukraine's independence. According to Deputy Minister of Economy Taras Kachka, agricultural exports are expected to grow by another 7% in 2025, driven by good harvests and an increase in the sown area of more expensive crops.
Economic growth will be hampered, as it was this year, by a challenging situation in the labor market due to mobilization and the large number of working-age people who have left the country due to the war. The emigration of Ukrainians will continue to lead to lower consumption compared to the period before the full-scale war.
Inflation will slow down but remain high
By the end of November this year, inflation accelerated to 11.2%. Experts believe that next year, the growth of consumer prices will slow down. According to the consensus forecast, in 2025, the annual growth will be 7.63%.
The government expects the highest inflation, having budgeted it at 9.5%. The National Bank and the IMF believe that it will not accelerate to that level, expecting 6.9% and 7.5%, respectively.
“We expect that inflationary pressure will persist in 2025, although it will be weaker than this year. Factors contributing to inflation, in our opinion, will include changes in tax policy, further adjustments in utility tariffs, and an increase in household incomes,” said representatives from Pivdenny Bank to “Minfin.”
According to estimates from Dragon Capital, consumer inflation will peak at around 11% in April-May next year due to a low comparative base in the raw food segment, but will decrease to 6.3% by the end of the year. Additionally, experts believe that fundamental inflationary pressure will gradually ease due to the stabilization of electricity prices for industrial consumers.
Significant price increases due to monetary emission are not expected. Since there are no anticipated issues with international assistance, the government will be able to avoid triggering the printing press. There are also hopes for a good harvest next year, which will help keep price increases in check starting from the second half of the year.
Where the exchange rate is headed
In 2024, the official exchange rate of the hryvnia against the dollar decreased by 10.1%, reaching 41.84 UAH/$. This roughly aligns with last year's government forecast.
Experts believe that the hryvnia will continue to weaken next year. According to the consensus forecast, by the end of 2025, the exchange rate will be 45.35 UAH/$, meaning the hryvnia will lose 8.4%. In fact, nearly all banks and investment firms have made quite similar forecasts, defining the exchange rate corridor within 44.5-46 UAH/$.
Only the Cabinet's expectations deviate from the overall trend, which speaks of an exchange rate of 45 UAH/$, but not at the end of the year, rather as an average throughout it. As noted by Oleg Pendzin, Executive Director of the Economic Discussion Club, this suggests that by next December, the rate could reach 47-47.5 UAH/$.
The trade balance will have a significant impact on the exchange rate. According to estimates from Capital Times, total Ukrainian exports next year will amount to $64 billion (this year it was approximately $58 billion). Meanwhile, imports will still be significantly higher at $92.2 billion. Thus, the trade balance will show a deficit of $28.2 billion, which will put considerable pressure on the exchange rate.
There is also an expectation of significant demand from the population for foreign currency, which traditionally increases during periods of hryvnia depreciation. Under these circumstances, the main factor supporting relative exchange rate stability will be interventions by the NBU.
“An important element of exchange rate policy next year will remain the volume of international assistance sufficient to support the market and the exchange rate through interventions by the National Bank. So far, under the current scenario, the volume of this assistance will be enough to balance the market.
Also, the National Bank's policy regarding further easing of currency restrictions will be a significant factor. If this occurs, then the additional burden of market support due to increased imbalance will again fall on the regulator's shoulders and its ability to sustain the market,” points out Sergey Kolodiy, chief expert in macroeconomic analysis at Raiffeisen Bank.
According to the expert, there are currently no reasons for alarm, although it should be understood that devaluation will continue next year.
Thus, the anticipated devaluation should be taken into account when choosing hryvnia investment assets that should at least cover it.