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Ukraine: Economy ends 2024 with a contraction
GDP drops for the first time in almost two years in Q4: GDP contracted 0.1% annually in Q4, according to recently released data (Q3: +2.2% yoy). The market had anticipated an expansion. The figure was the worst since Q1 2023. As a result, the economy expanded 2.9% in 2024 as a whole, down from 2023’s 5.5% rise as Russia’s invasion continued for the third consecutive year.
Economy loses momentum on multiple fronts: On the production side, agricultural output shrank 30.3% amid an intense drought (Q3: +1.6% yoy), momentum softened in manufacturing and construction, and wholesale and retail trade output declined more sharply; Russia’s attacks on energy infrastructure will have tempered momentum.
On the expenditure side, household spending growth fell to 4.2% in Q4 from Q3’s 8.8% as inflation and interest rates rose. Moreover, exports of goods and services rose at a slower rate of 8.5% (Q3: +13.4% yoy), while imports growth increased to 8.9% from Q3’s 7.9%. That said, public spending declined at a softer pace of 2.8% in Q4 (Q3: -11.2% yoy) and the rise in fixed investment more than doubled from the prior quarter, coming in at 9.5% (Q3: +4.6% yoy).
2025 to see modest GDP growth amid war: Our panel expects the economy to return to growth in Q1 2025 and to accelerate through the end of the year as inflation edges down in H2 and interest rates ease. That said, Russia’s invasion will continue to weigh on momentum: Our Consensus for 2025 as a whole is for muted GDP growth as household spending and exports lose steam. More positively, public spending could rebound and fixed investment is poised for an acceleration.
The outlook for Ukraine’s economy continues to hinge on the course of the war; protracted ceasefire talks, an unfavorable peace treaty and prolonged insecurity pose key downside risks. Additionally, dwindling inflows of foreign aid from the U.S. under Donald Trump’s presidency cloud the outlook further.
Panelist insight: Analysts at the EIU commented on the outlook:
“We expect there to be only slow growth in the first half of 2025, with tighter monetary policy and higher than previously expected inflation dampening real wages and deterring household spending initially. This is likely to change towards the end of 2025, however, with a ceasefire supporting further export growth.”
Goldman Sachs’ Andrew Matheny and Johan Allen said:
“The market continues to price a c.40% probability of GDP growing fast enough to trigger the contingent upside instrument in Ukraine’s newly restructured eurobonds, whose payouts are a function of attaining thresholds for Ukrainian real and nominal GDP growth through 2028. […] We estimate that Ukraine requires average growth of +5.0%yoy between 2025 and 2028 for the upside instrument to trigger. We view the market’s probability of Ukraine attaining this threshold as optimistic.”
