NBU commentary on the change in real GDP in 2023
In 2023, real GDP grew by 5.3%. This is evidenced by detailed indicators published by the State Statistics Service of Ukraine. On the one hand, a fairly high GDP growth was achieved after a deep recession in 2022 (by 28.8%). On the other hand, the economic recovery amid active hostilities, high security risks, and terrorist attacks by the Russians is a significant result.
In 2023, the full-scale war continued, and Ukraine suffered even greater losses and destruction. In particular, at the beginning of last year, shelling of energy infrastructure continued and electricity shortages persisted. However, since the second half of February, the situation in the energy sector has stabilized, primarily due to rapid repairs and enhanced air defense. This, together with the high adaptability of businesses and households, as well as loose fiscal policy, led to a significant reduction in GDP decline in the first quarter of 2023 to 10.3% compared to 30.6% in the fourth quarter of 2022, and subsequent GDP growth.
In the summer, Russians destroyed the Kakhovka hydroelectric power plant, which led to the flooding of large areas and water supply disruptions in the southern regions. The suspension of business operations during air raids also had a significant negative impact throughout the year. However, despite all the challenges of the war, real GDP returned to growth in the second quarter of 2023. In addition to the high adaptability of businesses and households, the stable situation in the energy sector for most of the year, and loose fiscal policy, the NBU's efforts to maintain macrofinancial stability in Ukraine played a significant role.
The actual real GDP growth rate was slightly lower than the NBU's estimate in its January 2024 Inflation Report (5.7%). This may be explained, in part, by more conservative estimates of grain and legume harvests by the State Statistics Service.
Consumption returned to growth
The economy's growth was largely driven by loose fiscal policy, which fueled domestic consumer and investment demand. Record budget spending on defense and security led to a further increase in the role of the public sector in the economy. Thus, public sector consumption grew by 9% over the year, and its share in GDP more than doubled in two years (reaching almost 42% in 2023 compared to about 18% in 2021).
Private consumption grew by 6.1% due to the resumption of growth in real household incomes, including wages in the private sector. At the same time, the number of forced Ukrainian migrants abroad continued to increase last year, limiting the recovery in consumer demand.
Investment activity increased by 52.9% in 2023
The rapid growth in investment was primarily driven by significant budget expenditures, although the private sector also showed signs of reviving investment activity amid improved financial results. In particular, businesses invested in building logistics capacities, renewable energy, and autonomous power supply, among other things.
The decline in exports slowed significantly, while imports returned to growth
Restrictions on the operation, and then the shutdown of the grain corridor due to Russian actions, as well as the continuing risks to the operation of Black Sea ports, constrained exports. At the same time, alternative export routes were being actively developed, in particular through the Danube ports, and a new sea corridor was launched in mid-year with the strong support of the Ukrainian defense forces and international partners. Its performance in December exceeded the capacity of the grain corridor. As a result, the decline in exports slowed significantly to 5.4%.
Amid limited domestic production due to the effects of the war and reviving demand, imports continued to grow. Last year, imports increased by 8.5%. As a result, the negative contribution of net exports to real GDP growth remained (at 6.3 pp), although it decreased compared to 2022.
Performance of most types of activity improved
In 2023, the favorable dynamics of most types of activity was driven not only by the low comparison base of the first year of full-scale war, but also by the successful adaptation of businesses to wartime conditions, and by significant amounts of government support.
The most significant growth in gross value added (GVA) occurred in the construction sector. Although the low comparison base played a significant role, growth in this activity was supported, in particular, by budget spending on rebuilding the destroyed infrastructure in the context of a full-scale war.
Due to significant budgetary spending on security and defense, GVA in the public administration and defense sector grew for the second year in a row. In two years, the GVA of this type of activity increased by more than 46%, and its share increased from about 6% in 2021 to 22% in 2023. The growth of healthcare GVA has resumed, given the high demand for medical services due to the war. Significant defense orders, processing of bumper harvests, and a recovery in domestic demand contributed to the growth of the manufacturing industry.
The increase in GVA in the IT sector recovered from last year's decline, with the industry growing at the third highest rate overall (ahead of only the construction and manufacturing sectors). This can be explained, in part, by defense needs and the development of government e-services.
Extremely favorable weather conditions last year resulted in record yields for most crops and a corresponding increase in harvests compared to 2022. As a result, agricultural GVA returned to growth. At the same time, the development of alternative export routes contributed to the recovery of the transportation sector and, together with reviving consumer demand, supported the growth of the trade sector.
The increase in private consumption also supported a number of service sectors, including the hotel and restaurant business. At the same time, changes in the structure of consumption led to a decline in the GVA of the arts and recreation and professional and technical sectors. The financial sector's GVA also declined, which may be explained, in part, by a decrease in the number of nonbank financial intermediaries.
A decline in the number of consumers of educational services and restrained state funding of education led to a further decline in the GVA of this sector. The energy and mining industries also continued to decline due to lower electricity generation and metal ore mining capacity, given limited export opportunities.
Ukraine's economic recovery will continue in 2024
According to the NBU's forecast, real GDP growth will continue throughout this year. The economic recovery will be supported by the continued loose fiscal policy thanks to significant international assistance, improved business expectations and household income growth, and measures taken by the NBU and the government to maintain macrofinancial stability.
However, risks remain, primarily related to the war. In particular, economic growth may be constrained by the persistence of security risks and higher intensity of hostilities, further destruction of energy infrastructure, and increased migration trends. A decline in the yields of major crops could also have a significant impact if weather conditions return to average climate norms.
These and other factors will be taken into account in the updated macroeconomic forecast of the National Bank of Ukraine, which will be announced during the regular press briefing on monetary policy on April 25, 2024, and published in the Inflation Report on May 2, 2024.
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