Inflation to Start Declining Next Year, Economy to Keep Growing – NBU Inflation Report

Inflation will tick up to 9.7% by the end of 2024 but will drop to 6.9% next year.
It will return to the NBU’s 5% target in 2026.
The economic recovery will continue, with real GDP expected to grow by 4% this year.
In the next two years, economic growth will accelerate to 4.3%–4.6% per year.
This scenario of the NBU"s forecast is based on the assumptions that sufficient international support would be maintained and that the economy’s operating conditions would gradually normalize, which would, among other things, facilitate the return of migrants and growth in investment.
The detailed analysis and macroeconomic forecast can be found in the quarterly Inflation Report of October 2024.
Inflation will continue to rise in the coming months, but will start to decline in the spring of 2025 and will continue to move toward the NBU"s 5% target
The acceleration of inflation in the coming months will reflect a smaller supply of certain food products than last year, an increase in aggregate demand due to significant budget spending, a rapid growth in wages, and a widening of energy shortages during the heating season.
As a result, consumer inflation will reach 9.7% by the end of 2024, and will temporarily exceed the 10% level in early 2025.
That said, inflation will start to decline in the spring of 2025.
Thanks to the NBU"s interest rate and exchange rate policies, as well as an increase in food supply and an easing of external price pressure, inflation will slow to 6.9% at the end of 2025.
In 2026, inflation will continue to decline, reaching the 5% target as the situation in the energy sector improves and harvests increase.
The NBU"s interest rate and exchange rate policies will be aimed at keeping inflation expectations in check and bringing inflation to the 5% target in the coming years.
The economy is recovering faster than expected.
In 2024–2026, real GDP will grow by 4%–4.6% per year
Given the stronger harvest and faster harvesting of early grain crops, smaller electricity shortages, and businesses’ better adaptation to power outages, the NBU has improved its estimate of real GDP growth for Q3 2024 from 3.1% to 4%.
This led to a revision of the forecast for economic growth in 2024 from 3.7% to 4.0%.
Going forward, Ukraine"s real GDP growth will accelerate to 4.3% in 2025 and 4.6% in 2026.
As a result, the gap between real GDP and its potential level will be minimized.
The economic recovery over the forecast horizon will be driven by the continued loose fiscal policy and a revival in domestic demand supported by rising wages, as well as by increased harvests, strong external demand for Ukrainian products, and investments in recovery, particularly in the energy sector.
However, labor shortages, security risks, migration processes, and the slow normalization of economic conditions will continue to restrain economic activity.
Employment and wages will gradually increase due to a shortage of labor and stronger demand from employers
In Q3 2024, the demand for workers, as measured by the number of vacancies on job search websites, continued to increase as economic activity kept recovering.
The number of vacancies in absolute terms was the highest since the start of the full-scale invasion, with growth being observed across almost all occupations.
Overall, the ratio of applicants per vacancy is currently lower than in 2021.
The shortage of workers on the labor market continues to fuel wage growth.
Real wages are expected to grow by 14% this year.
The upward trend in wages will continue in the coming years as employers compete for workers.
The unemployment rate will gradually decline as demand for labor increases, but will remain higher than before the full-scale invasion.
According to the NBU"s forecast, unemployment will decline to 14.2% this year, and to 11.6% and 10.6% in the next two years, respectively.
Employment growth will be limited by the persistence of mismatches in the labor market due to the effects of the war, including mobilization and migration.
The NBU assumes that in 2024 the number of forced migrants will rise by around 500,000 people, and next year by another 200,000 people.
It is expected that the return of migrants will begin in 2026 (around 200,000 people).
International assistance will remain an important source of financing the budget deficit and accumulation of international reserves
The budget deficit will remain significant over the forecast horizon, although it will gradually narrow (from 23.3% of GDP in 2024 to 12.4% of GDP in 2026) due to the increase in internal resources amid further economic growth.
Increased domestic borrowing and continued significant external financing will help cover the budget deficit.
Ukraine is expected to receive USD 41.5 billion from international partners this year, and around USD 38 billion and USD 25 billion in 2025–2026, respectively.
External financing will enable the NBU to maintain a sufficient level of international reserves.
By the end of 2024, they will reach USD 43.6 billion.
Going forward, as international support expectedly declines, reserves will gradually go down to USD 41 billion in 2025 and USD 34.7 billion in 2026.
Such levels will be sufficient for maintaining the FX market sustainability.
In addition to the updated macroeconomic forecasts, the October Inflation Report features a number of boxes, including:
from peg exchange rate to flexible inflation targeting during the full-scale war in search of optimal flexibility: the quantitative inflation target and the monetary policy horizon in search of optimal flexibility: what is an acceptable deviation of inflation from the target? restoring sufficient effectiveness of the key policy rate as a prerequisite for the transition to flexible inflation targeting.