Ukraine: War-torn economy expands at a slower pace in Q3
According to a preliminary estimate, GDP grew 9.3% year on year in the third quarter of 2023, moderating from the 19.5% expansion seen in the second quarter. This result was stronger than analysts had expected and marked the second consecutive expansion since Q4 2021, following Russia’s invasion in February 2022. Meanwhile, on a sequential basis, GDP grew by 0.7% quarter on quarter in Q3 following Q2’s 0.8% rise.
Absent a detailed breakdown, Q3’s softer growth likely stemmed from the collapse of the Black Sea Grain Initiative in July, its negative impact on exports and Russia’s subsequent attacks on ports and grain-storage facilities. That said, sustained disinflation and the National Bank of Ukraine’s interest rate cuts should have supported domestic demand.
Economic growth is seen remaining near 2023’s projected rate in 2024. A slight acceleration is expected on the back of stronger private spending growth and a rebound in exports. That said, the outlook for Ukraine’s economy continues to hinge on the course of the war, the counteroffensive in the east and inflows of international assistance. Crucially, newly pledged aid fell to the lowest level since the start of the 2022 invasion between August and October 2023. In addition, December saw the U.S. Senate block USD 66 billion of emergency aid and Hungary veto USD 55 billion in EU fund disbursements. In addition, blockades on the western border due to protests by Polish truck drivers since November also bode ill for activity. More positively, the EU opened membership talks with Ukraine in December, which should support investment in 2024.
Andrew Matheny, analyst at Goldman Sachs, commented on potential risks to the balance of payments:
“Risks in 2024 have increased considerably on the back of recent U.S. and European political developments. A possible shortfall of U.S. financial assistance to Ukraine would pose a significant risk to the country’s balance of payments, the Hryvnia, and by extension the growth outlook.”
Additionally, analysts at the EIU commented on the GDP outlook:
“Private consumption will be supported by the normalisation of labour conditions in the vast majority of the country, as well as increased demand for Ukrainian goods and services both domestically and abroad. Steady external financial flows and fiscal expenditure will drive investment. Deepening ties with the EU as part of Ukraine’s accession process will also have a positive effect on the country’s ability to realise its export potential and as a recipient of investment.”