How fast will Ukraine's economy grow
Vyacheslav Butko, economist, economic advisor at the Kyiv Security Forum
Ukraine's GDP grew by 1.1% in the first two months of 2025. This compares to 3.6% in the first two months of 2024. The growth rate has slowed more than threefold. There are reasons to believe there are no prospects for significant economic growth.
The NBU's veiled acknowledgement of the lack of economic growth prospects has gone largely unnoticed. The NBU's latest Inflation Report states: ‘In 2024, GDP approached its potential level. The GDP gap will remain close to zero over the forecast horizon. Production capacities have decreased due to the destruction and loss of territories’ (quote).
The terms ‘potential GDP’ and ‘GDP gap’ are used in narrow circles of economic growth specialists and look exotic to ordinary readers. Potential GDP is related to the production function, where the key parameters are the amount of labour or employees and production capital (factories, equipment, machines, etc.), reflecting also the state of technological and institutional development.
In simple terms, ‘potential GDP’ is when the possible production capacity is fully utilised and full possible employment is available (excluding those not looking for work). The ‘output gap’ is how much actual GDP growth differs from what it could have been if all resources were used in the economy to meet demand (in other words, the difference between aggregate demand and potential supply).
Thus, the phrase ‘the GDP gap will remain close to zero’ means that the growth potential of Ukraine's economy is almost non-existent – GDP has either come close to its potential level or has already reached it.
This is because the main driver of growth, the state budget stimulus, has exhausted its impact. Ukraine's economy grew in 2023-2024 primarily due to the ‘budgetary impulse, ’ much of which was provided by international financial assistance. It created demand and supported consumption, which were the key drivers of economic growth at the time.
The budget deficit of 20-24% of GDP has fulfilled its function – the budgetary impulse has helped to restore growth after the 29% drop in GDP in 2022. However, the budgetary impulse cannot provide a greater acceleration in growth. Since August-September 2023, Ukraine's GDP has reached a ‘plateau’ – 75-78% of the pre-war level.
By the way, it is possible to calculate the damage the war has done to Ukraine's GDP over three years. The Ministry of Economy estimates GDP growth in 2024 at 3.6%. Based on this, we can calculate the change to the pre-war level. In 2022, a 28.8% drop; in 2023, a 5.3% increase; and in 2024, a 3.6% increase. Thus, in 2022-2024, GDP will decline by 22% compared to 2021 (1 * 0.712 * 1.053 * 1.036 = 0.78, i.e., GDP in 2024 is equal to 78% of GDP in the last pre-war year).
According to the NBU's view, which is set out in the Inflation Report, Ukraine's GDP has the potential to grow due to higher productivity, but its growth will be limited by a labour shortage and a lack of investment in productive capital.
As for productivity growth, there are few prerequisites for this – there is no massive introduction of modern technologies, and the institutional environment and business climate remain less than friendly. No significant investment should be expected until the war is over and for some time after that, most likely for a long time, due to the threat of renewed hostilities (Russia's intentions towards Ukraine will remain, and investors understand this). As for the labour component of economic growth, the shortage of labour will continue, especially skilled labour. Forced migrants understand the fragility of peace (if it comes), and skilled professionals have mostly managed to integrate into the countries they have left.
As for the budget. The main drivers of economic growth in 2023-2024 were consumption and public spending. If the state spends more than it collects in taxes (budget deficit), it leaves money in the economy, allowing the private sector to spend, stimulating the economy. If it is possible to increase the budget deficit, it will be to support defence, not private consumption. Therefore, the contribution of consumption to GDP will not grow, and Ukraine's GDP will lose its main growth driver.
Traditionally, the so-called ‘net exports’ (exports minus imports) have made a negative contribution to Ukraine's GDP. This is largely due to the war. Firstly, we have to buy weapons, and the volume of imported weapons purchases will increase as a result of the non-extension of US military support. Second, after Russia destroyed Ukraine's oil-refining industry, our country is almost entirely dependent on fuel imports. Third, natural gas imports will increase (due to the destruction of gas production infrastructure). The biggest challenge may be the non-renewal of the EU's trade preferences for Ukraine (known to the general public as ‘trade visa-free travel’), which expire on 5 June this year. The European Commission has not yet submitted proposals to the EU Council on a new format of trade relations with Ukraine. If the ‘trade visa-free regime’ is not extended, Ukraine may lose €3-4 billion in exports, which is 2-2.5% of its GDP.
Thus, the limits of growth driven by private consumption and public spending appear to have been reached. ‘Net’ exports will continue to make a negative contribution to GDP. In the coming years, Ukraine's economy is likely to grow at a much slower pace than in 2023-2024.