National Bank More Optimistic Than Ministry of Economy on Ukraine's Economic Dynamics at Start of Year

The National Bank of Ukraine (NBU) has articulated its perspective on the assessment made by the Ministry of Economy, Environment, and Agriculture, which claims that Ukraine's gross domestic product (GDP) decreased by 1.2% in the first two months of 2023. Deputy Head of the NBU, Volodymyr Lepushynskyi, believes that this assessment is overly pessimistic, asserting that the economy is performing better than indicated by the Ministry.

In an interview with Interfax-Ukraine, Lepushynskyi stated, "We are not as pessimistic about the GDP dynamics in the first two months as the Ministry of Economy. Of course, the economy has suffered, but we had sufficiently resilient consumer demand that supported it." These remarks highlight the NBU's optimistic stance on the economic situation in the country, despite existing challenges.

Lepushynskyi also pointed out that shelling and energy deficits have indeed negatively impacted the industrial sector, which has experienced a decline. However, he emphasized that the final GDP figure will also depend on other sectors of the economy. "So far, the situation in the energy sector is close to what we anticipated in January. I remind you that our forecast predicted a negative impact of energy deficits on GDP by 0.4 percentage points: that is, without energy deficits, the GDP growth forecast for this year would have been 2.2%, not 1.8%," he noted.

The Deputy Head of the NBU also highlighted that attacks on the energy system affect the economy through several channels: suppression of business activity, additional pressure on prices, deterioration of the trade balance, and higher migration risks. Nevertheless, he remarked that Ukraine has endured the consequences of such attacks multiple times before. "Also, among energy experts, there is currently a prevailing opinion that by next winter, we will be better prepared than we were for this one. Thus, more favorable scenarios may materialize," Lepushynskyi added.

However, despite the optimistic outlook, Lepushynskyi was unable to provide a more concrete assessment of the economic dynamics at the beginning of the year. This is attributed to a lack of necessary information and the NBU's policy of publishing forecasts and macroeconomic assessments quarterly. "Our overall approach to forecasting is established: we publish forecasts quarterly and conduct analyses of actual dynamics and risk assessments at interim meetings," he stated.

The Deputy Head of the NBU also emphasized that this forecasting approach is employed by all central banks that target inflation, including the Bank of England, the Czech National Bank, the Swedish Riksbank, and the European Central Bank. "They also make quarterly forecasts and assess risks in between to avoid cluttering the airwaves," Lepushynskyi explained.

He reminded that the next macroeconomic forecast from the NBU will be published on April 30, 2023. Regarding the impact of military actions in the Middle East, which began in late February, on Ukraine's GDP dynamics, Lepushynskyi confirmed the preliminary assessment that it is currently close to zero. He stressed that this impact will be indirect and prolonged over time.

Lepushynskyi also noted that there are several dimensions to this impact. The first is security-related, as the war in the Middle East accelerates the depletion of resources, including air defense and missile defense systems, and enhances Russia's ability to finance its war. The second dimension involves stricter global financial conditions. He explained that leading central banks are likely to respond to inflationary risks by tightening policies, which could lead to increased capital costs and slow down the economies of Ukraine's main trading partners.

However, this significant risk is mitigated by the fact that most of Ukraine's financing is not tied to global financial conditions but rather depends on political agreements with partners. "Regarding the impact on the structure of exports, demand for metallurgical products may decline, but demand for food and defense products will not. Therefore, overall, the slowdown in partner economies creates risks, but they are unlikely to become a critical factor restraining our economy," Lepushynskyi concluded.

It is worth noting that at the end of January 2023, the NBU downgraded its GDP growth forecast for Ukraine in 2026 to 1.8% from 2% and lowered the GDP growth estimate for 2025 to 1.8% from 1.9%, a figure later confirmed by the State Statistics Service. According to the updated forecast, the NBU expected economic growth of 2.4% in the first quarter of 2023, 2.5% in the second, followed by a slowdown to 1.6% in the third quarter and 1.0% in the fourth. The previous forecast, published in early November 2022, anticipated GDP growth of 3.1% in the first and second quarters, with a slowdown in the third and fourth quarters to 1.4% and 0.8%, respectively.