New EBRD forecast sees Ukraine’s recovery gaining traction

• EBRD expects Ukraine’s economy to grow by 3.5 per cent in both 2021 and 2022
• Rich grain harvest and return of business activity will support the recovery
• Growth at risk from staggered reform and slow Covid-19 vaccine rollout

Ukraine’s economic recovery is likely to gain momentum over the remainder of 2021, the European Bank for Reconstruction and Development (EBRD) says in its latest Regional Economic Prospects (REP) report, published today.

The Bank forecasts the country’s gross domestic product (GDP) to increase by 3.5 per cent year-on-year in both 2021 and 2022. Growth in 2021 will be fuelled by a rich grain harvest and the continued normalisation of business activities, though slow progress on reform and rollout of the Covid-19 vaccination remain major risks to the forecast.

Because of the prolonged lockdown in early 2021, Ukraine’s economy declined by 2.2

per cent year-on-year in the first quarter, before embarking on a recovery of 5.7 per cent in the second quarter. Driven by double-digit growth in household consumption and investment, the recovery was underpinned by strongly rising prices for major export products such as cereals and iron. Improved terms of trade helped to maintain a positive current account, which increased the supply of foreign currency and sparked the appreciation of the local currency, hryvnia.

Inflation accelerated over the course of 2021 to 11.0 per cent in September fuelled by rising food and energy prices. This prompted the National Bank of Ukraine to tighten monetary policy and raise the refinancing rate four times already, from 6 per cent at the beginning of the year to 8.5 per cent in September 2021.

The EBRD is raising its broader economic growth forecast for the regions in which it invests to 5.5 per cent for 2021. While this is an upward revision of 1.3 percentage points from its June forecast, after a strong performance in the first half of the year, the Bank warns that serious threats abound.

High commodity and energy prices, tight labour markets, supply-chain disruptions and currency depreciation in some EBRD investee economies had begun to push up inflation even before the latest spike in Covid-19 infection cases.

On average, inflation in the EBRD regions exceeded its end of 2019 levels by 3 percentage points in September 2021. In response, a number of central banks in the EBRD regions have raised policy interest rates.