The National Bank of Ukraine (NBU) estimated the growth of real gross domestic product (GDP) of Ukraine in the second quarter of 2024 compared to the same period last year at 3.7%, as it predicted in April.

"It [growth] was supported by an increase in budget expenditures, a faster harvest of early grains and subsequent recovery in livestock farming, as well as stable operation of the sea corridor," the National Bank noted in the Inflation Report published on its website.

Explaining the slowdown in growth rates from 6.5% in the first quarter, the NBU pointed to the exhaustion of the low comparison base effect and, above all, the destruction of the energy infrastructure and long-term power outages for consumers. Long-term power outages in the second quarter led to a noticeable deterioration in business and consumer sentiment and a weakening of economic activity in a number of sectors, primarily energy-intensive ones, the needs of which are difficult to meet with autonomous power supplies (certain areas of the food industry, livestock farming, heavy industry), the central bank said.

"Economic activity in the second quarter was also restrained by the worsening of personnel problems, as well as an increase in the duration of air raid alarms," ​​the NBU added.

At the same time, its analysts believe that businesses and the population are better adapted to the electricity deficit than in 2022–2023, and in addition, part of the electricity needs were covered by an increase in its imports, which, together with other factors, made it possible to maintain the positive dynamics of a number of sectors in the second quarter of 2024, in particular, metallurgy and transport.

According to the National Bank, high demand for fertilizers from farmers supported the chemical industry, and amid electricity deficits, sales of goods to ensure energy autonomy, restaurant attendance, and demand for courier services increased.

"In the second half of the year, economic activity will continue to slow down primarily due to higher energy deficits. The shift in the harvesting of early grain to June will affect agricultural and economic activity indicators in the third quarter," the inflation report states.

According to it, the National Bank expects a slowdown in GDP growth in the third quarter to 3.1% and in the fourth quarter to 2.3%, while in the April report it predicted them at 1.3% and 4.1%, respectively.

Overall, as the NBU noted, the State Statistics Service's much higher than expected estimate of GDP growth in Q1, slightly higher harvest estimates due to an increase in sown areas, and a wider budget deficit led to an improvement in the forecast for real GDP growth in 2024 to 3.7% from 3% in the April report.

"Larger electricity deficits than previously expected will restrain GDP growth over the entire forecast horizon. Another factor that will limit economic recovery is the shortage of workers. However, thanks to soft fiscal policy, the revival of external demand, as well as the already demonstrated high adaptability of businesses and the population and further normalization of economic conditions, the economy will grow by 4-5% in 2025-2026," the NBU believes.

He added that GDP will still be below its potential level, which will contain inflationary pressure.

It is specified that in the first quarter of 2025, the National Bank forecasts GDP growth of 1.8%, in the second - 2.8%, however, due to the acceleration of growth to 5.1-5.9% in the second half of the year, it will amount to 4.1% for the next year as a whole.

Unlike the April inflation report, the July one again lacks an alternative scenario.

In the updated report, the National Bank kept the number of key risks of the forecast (with a strong impact and a probability of 25-50%) at three: a longer duration and intensity of the war, greater budget needs and a greater electricity deficit due to further damage to the energy infrastructure.

The negative risks with a high degree of probability (25-50%) were also supplemented by the potential transfer of interest rate increases or additional tax introduction to prices, although the NBU estimates its impact as moderate

At the same time, the degree of impact of the risk of a more intense and prolonged blocking of freight traffic across the border with individual EU countries in the updated inflation report was reduced from moderate to weak, while maintaining the probability of 15-25%.

In addition, the National Bank replaced the risk of an escalation of the situation in the Red Sea, the probability of which it estimated in April at 15-25% with a weak degree of impact, with a new risk of increased geopolitical tension, the degree of impact of which is higher - moderate.

At the same time, the NBU added two positive risks: receipt of income from immobilized assets of the Russian Federation (15-25% probability with a high degree of influence) and rapid restoration of damaged energy infrastructure (15-25% probability with a moderate influence).

However, at the same time, the probability of another positive risk - rapid implementation of a large-scale restoration plan - was reduced from 15-25% to less than 15%.

"The balance of risks of the baseline forecast is shifted towards deterioration of the pace of economic growth in Ukraine and increased price pressure due to possible tax changes," the NBU concluded.