Presenting the macroeconomic forecast of the country in the conditions of the war and lack of adequate statistical information seems quite risky, given the unforeseen events significantly affecting the socio-economic situation in the country. Still, evaluation of the current situation inevitably makes you wonder "what's next", "what changes should we get ready for", "how achievable are these targets" (both for the state and households).

At the end of March 2022 (a month after the beginning of the Russian aggression) we published our forecast of the key macroeconomic indicators. Today we can state that although the military and security situation has improved, compared to March, the socio-economic situation is still characterised by huge human losses, unprecedented flows of refugees and displaced persons, significant destruction of cities, homes and infrastructure facilities, foreign exchange and price imbalances, etc.

Some of our March assumptions have proven true. This lets us clarify the key macroeconomic indicators.

GDP. Many experts believe that the real GDP will fall by about a third by the year end. This was our March forecast, too. Today, we confirm this estimate, based on the results of the entire current year.

Key macroeconomic indicators

Despite the expected certain stabilisation of the economic situation in the fall of 2022 (decrease in inflation and devaluation rates), GDP will fall by about 35% — below $130 billion.

Inflation and exchange rate. Although the energy crisis will continue in the fall, the main price shocks appear to be curbed. As a result of the reduction of Ukrainian agricultural and food exports, the supply of such goods on domestic markets will increase, which will have a stabilising effect on consumer markets. Therefore, no inflationary shock should be expected in autumn. Although consumer prices will continue to rise, the average annual inflation rate will be about 20% (December to December — below 30%).

Inflation expectations in March were significantly more pessimistic. However, the NBU managed to avert potential foreign exchange and payment crises. 

Postponement of foreign debt interest payments and new aid to Ukraine from international partners will help preserve foreign exchange reserves.

Welfare of households. By the end of 2022 the real well-being of households will continue to decrease. The average salary will be close to the level of the beginning of 2022. Although payments to the military have increased significantly, this will only partially "cover" total losses in the salaries of other employees. The share of final consumer spending in the GDP structure will reach a record level — slightly less than 100%.

At the same time, preserving salaries will restrain the inflation-devaluation spiral. Some groups of the population will be forced to sell part of their foreign currency savings, which will even strengthen hryvnia.

Foreign trade. Foreign trade indicators will decline significantly. Exports of goods will fall by 20–25%, imports — by 15–20%, resulting in a significant foreign trade deficit.

Export losses are mainly caused by the destruction of the industrial potential (including metallurgy) in Kharkiv, Donetsk and Mykolaiv regions. Some relaxation of grain export will not make up for the losses of the first half of the year.

In recent years, the deficit in trade in goods in Ukraine has been partially "offset" by a surplus in trade in services. In March 2022 the situation changed radically: the deficit in trade in services was estimated at $622 million (in March 2021, the surplus was $345 million).

The deficit of foreign trade in goods and services may exceed 10% of GDP. Meanwhile, the balance of the current accounts will be positive, due to significant aid from international partners (their volume will exceed the foreign trade deficit), which will contribute to macroeconomic stabilisation.

Comparison of forecasts. Summing up, firstly, the nature and trend of both forecasts are quite close. Secondly, the September forecast looks macroeconomically more attractive, compared to the March one.

Comparison of March and September forecasts for 2022

Even in March, when the situation was extremely threatening, we believed in our armed forces and fairly quick macroeconomic stabilisation (albeit on a relatively low base). Our current vision of the GDP dynamics and structure, exchange rate and price trends, well-being of households fully correlates with the March assumptions.

At the same time, in March we did not foresee the Russian blockade of Ukrainian ports, which significantly affected our foreign trade assessment. However, even in the conditions of the deterioration of the foreign trade deficit, the balance of current accounts remains positive "...at the expense of significant assistance and grants from international partners", as indicated in the March forecast and as it actually happens.

National wealth (instead of conclusions). Although, when assessing the country's economy, various aspects and characteristics of GDP (gross domestic product) are often referred to, this significantly limits analytical consideration. GDP in fact means the size and structure of the added value created during the year on the basis of achievements of the previous years. If in peacetime using GDP is sufficient, with significant human losses and infrastructure devastation, it is not enough. Even high dynamics of GDP cannot cover the loss of wealth, formed over decades. That is why it gives little to assess the country's development.

For a rational assessment of losses, it might be appropriate to refer to the category of national wealth — everything accumulated by society throughout its history; all that the nation has now, including not only the material wealth but also human capital.

Ukraine's losses from the war are not limited to the drop in GDP, because the losses in national wealth are much greater and still need to be fully assessed. This is important for assessing the current state of the domestic economic, social, humanitarian situation, and therefore, the need of resources (material and human) for the recovery of Ukraine.

Ukraine is facing new, extremely difficult challenges. However, this is not a reason for pessimism. For a long time, this country was at the crossroads of a civilisational choice — between the Euro-Atlantic and Eurasian (pro-Russian) paths of development. Today, our choice is clear.

Ukraine's victory in the war and soonest socio-economic recovery are important not only for this country but also for human development, based on the principles of democracy and humanitarian values.

See the full article in Ukrainian at https://razumkov.org.ua/statti/zauvazhennia-do-makroekonomichnogo-prognozu