The European Bank for Reconstruction and Development (EBRD) has downgraded its growth forecast for Ukraine's economy in 2025 to 3.5%, down from 4.7% expected in September of last year. The bank anticipates a growth acceleration to 5.0% next year, provided that hostilities cease this year.
"Although Ukraine entered 2025 with secured external financing for the year, it is facing a slowdown in economic growth and rising inflation due to the impact of the war that began with Russia's invasion in February 2022," the report titled "Weak Momentum Amid Fragmentation of Trade and Investment," published on Thursday, explains.
The report notes that the continuation of the war and Russia's massive attacks on Ukraine's energy infrastructure have resulted in both an electricity deficit, forcing Ukrainians to pay high prices for imported electricity, and a severe labor shortage. Real GDP growth has noticeably slowed from over 5.0% in the first half of 2024 to around 2.0% in the second half; the overall GDP figure for 2024 is estimated at 3.0%.
The EBRD adds that the resurgence of inflation in the second half of 2024 was driven by rising electricity costs, adjustments in regulated utility prices, rapid growth in real wages, and the depreciation of the hryvnia against the U.S. dollar following the weakening of the exchange rate peg in October 2023.
"Annual inflation reached 12% in December 2024 and is likely to remain at that level in the first half of 2025, before dropping back to a single-digit figure by the end of the year," the bank forecasts.
According to its estimates, Ukraine's budget deficit for 2025 will be 19.4% of GDP and will be fully financed through external budget support amounting to $38.4 billion. This amount includes $13.7 billion from the EU under the Ukraine Facility, $22.0 billion from G7 countries based on receipts from frozen Russian assets under the ERA mechanism, and $2.7 billion from the IMF.
The negative factors affecting growth in the second half of 2024 are likely to persist in 2025, according to EBRD experts.
At the same time, they expect that the proven resilience and adaptability of businesses, a well-functioning Maritime Corridor, strong public consumption incentives, and increased military procurement by domestic enterprises will contribute to economic growth.
Overall, the regional economic forecast of the EBRD for 36 countries where it invests, from Central and Eastern Europe and Central Asia to the Southern and Eastern Mediterranean (SEMED) region, has also been downgraded by 0.3 percentage points (pp) compared to the bank's forecast in September 2024 – to 3.2%, with an expectation of growth to 3.4% in 2026.
"The downgrade is primarily related to weaker external demand in Central Europe, the Baltic States, and southeastern EU countries. It also reflects the ongoing impact of conflicts and the slow pace of reforms in the Southern and Eastern Mediterranean (SEMED) region," the report notes.
The report emphasizes the weak momentum of global growth and the persistent gap between the performance of advanced European economies and the U.S., as well as growing uncertainty regarding potential tariff increases on U.S. imports and retaliatory measures from trading partners.
As reported, the World Bank (WB) in its "Global Economic Prospects" published on January 17 has downgraded its GDP growth forecast for Ukraine in 2025 to 2% from 6.5% in its June report, but has improved its forecast for 2026 to 7% from 5.1%.
The National Bank of Ukraine has also revised its forecasts. Considering security risks and the challenging labor market situation, the NBU lowered its real GDP growth forecast for 2025 from 4.1% to 3.6% at the end of January, while the state budget for 2025 is based on a GDP growth forecast of 2.7%.