NBU inflation report: what to expect from key economic indicators?
Feb 13, 2023
5 min read
Share this post
The National Bank of Ukraine has published an inflation report that forecasts inflation to slow to 18.7% this year. This trend is expected to start this spring and predictably continue over the next few years. The main factor in the economic recovery will be the security situation and the location of the hostilities, which will directly affect the restoration of the country's economic capacity.
The positive dynamics of inflation expectations are due to strict monetary measures taken by the national regulator and companies adapting to the new operating conditions, even in the face of electricity shortages. It is unlikely that inflation will decline any faster, as the war and its effects are still the main factors of pressure on the economy. If the security situation improves, we can expect inflation to decline this year. In the near term, inflation is expected to decline to 10.4% in 2024 and 6.7% in 2025, respectively.
Infographic: Consumer price index. Source: NBU
The main economic risks remain the continuation of hostilities and further destruction of critical infrastructure. It is predicted that a decline in economic activity and inflation is possible if russia continues its terrorist attacks on Ukraine. However, other factors could negatively affect the economic recovery. For example, unforeseen circumstances may require additional funding from the budget or lead to a shortage of certain goods. If the war is prolonged, migration abroad will increase, which may cause problems in the labor market in the long term. There is a possibility that aid from foreign partners will decrease, and the operation of grain corridors will be disrupted. These options are also taken into account when calculating risks to the economy.
In Western countries, there is a tendency for inflation to slow down. For example, inflation in the Eurozone fell to 8.5% in January, and in December, this figure reached 9.2%. The EU countries have already passed the recession's peak. Such a sharp recovery from economic issues is mainly due to low energy prices and relatively high gas reserves in the EU. After the recession that hit the European Union, it should not be expected that the recovery will be rapid. The European Central Bank is aware of this and may continue to raise its key policy rate slightly to reach its inflation targets.
Currently, the NBU considers its priority task to maintain the stability of consumer prices. Among the factors that had the most significant impact on the acceleration of inflation last year were high energy prices, rising logistics costs for businesses, and a decline in the supply of goods and monetary factors. On the other hand, we also have several factors restraining inflationary processes: the strict fixation of the hryvnia exchange rate against foreign currencies, a moratorium on utility price increases for households, lower excise taxes on fuel, and reduced demand due to demographic changes.
A separate factor affecting the economic situation is the rocket attacks on the electricity infrastructure. The consequences of these attacks were more significant than previously predicted, and it took much longer to restore the power sector. Nevertheless, the Ukrainian power grid has survived, partly thanks to enterprises that have provided autonomous power generation devices. The electricity deficit at the end of 2022 amounted to 23%, and two possible scenarios are being considered, as shown in the graph.
Infographic: Forecasts of electricity deficit in the power system. Source: NBU
This will significantly impact inflation through increased production costs, as electricity costs rise significantly if a company uses an autonomous generator. As of the end of last year, more than 354,000 generators were imported to Ukraine, which increased the demand for fuel for them.
Our country's economy has been operating for almost a year despite the full-scale war. Obviously, we face the biggest challenges from the security situation — the more territories are de-occupied, the faster the economy will recover, and the inflationary pressure will ease. Business activity, as well as supply and demand in the market, will depend on the state of the power grid and demographics. The economy is still heavily dependent on Western donors, which is unlikely to change soon.
Share this post
We recommend to read
Artificial intelligence cryptocurrency prospects
Feb 27, 2023
4 min read