OECD Economic Outlook, Volume 2025 Issue 1: Ukraine

Ukraine

Activity has continued to recover but at a slowing pace. Growth is projected to moderate to 2% in 2025 and remain at 2% in 2026 if security is not restored. Growth will be supported by international assistance, defence spending and domestic private demand. Shortages of labour will continue to constrain growth. Uncertainty remains exceptionally high. A worsening security situation or less external support pose downside risks to the outlook. Conversely, if security can be restored sooner, reconstruction and recovery would accelerate.

Public spending is supporting activity. The National Bank of Ukraine has rightly raised the key policy rate in response to rising inflation and continues to move towards a fully floating exchange rate. In the face of high defence and reconstruction spending needs, public revenues can be bolstered by pursuing reforms to tax administration to better support compliance, reducing exemptions and narrowing the coverage of the simplified tax regime. Policies to support veterans and migrants to reintegrate into the economy will be central to future economic growth.

The economy remains resilient but the pace of the recovery has slowed

GDP grew by 2.9% in 2024. Growth slowed in the second half of 2024 and early 2025, due to ongoing labour shortages and sustained Russian attacks on energy infrastructure. Despite this, business sentiment improved sharply between January and March 2025. Strong consumer demand, reflecting rising real wages, increased defence-related production and construction activity, and a more consistent supply of energy contributed to the improved expectations of businesses across all sectors. At the same time, inflationary pressures are high. CPI inflation reached 15.1% in the year to April 2025, reflecting higher domestic food and energy prices, while core inflation was 12.1%. Labour supply increased in the first quarter of 2025 as younger and older adults as well as women were drawn into the workforce, but labour shortages continue to be the main constraint facing businesses.

Ukraine

Source: State Statistics Service of Ukraine and OECD calculations.

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Ukraine: Demand, output and prices

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Agricultural and metallurgical exports declined in the second half of 2024 before stabilising in the first months of 2025. Imports increased, widening the trade deficit. The direct effects of the 25% US tariff on steel and aluminium imports and 10% tariff on other goods are limited, but the indirect effects through weaker demand in other markets may be more significant. Ukraine entered a new agreement with the European Free Trade Association eliminating or reducing tariffs on a range of goods. External assistance over the first months of 2025 was adequate to cover financing needs and central bank external reserves rose by over USD 4 billion to USD 46.7 billion at the start of May 2025, the equivalent of nearly six months of imports.

Interest rates have been raised while public finances remain under stress

The fiscal deficit is forecast to be around 20% of GDP in 2025. External support, including the USD 50 billion Extraordinary Revenue Acceleration (ERA) facility and the EU-financed Ukraine Facility, cover much of the financing needs through 2025. Fiscal policy remains focused on financing the war effort while protecting essential public services. In response to the increase in inflation, the National Bank of Ukraine (NBU) raised the key policy rate from 13.0% in December 2024 to 15.5% in March 2025. Continued vigilance by the National Bank of Ukraine will be needed to stabilise inflation and ensure expectations remain well-anchored.

The recovery will remain weak until security is restored

Moderate growth of 2.0% is expected in 2025, as defence spending continues to support activity and consumer spending rises as labour shortages further propel wage growth. Somewhat less favourable agricultural conditions in 2024 will weigh on output and exports into 2025 and contribute to inflation. The suspension of operations at the Pokrovsk coal mine is expected to weigh on steel production and exports. Growth is forecast to remain at 2% in 2026. Inflationary pressures are expected to remain elevated in the near term due to tight supply, and as rising labour costs and higher energy prices for producers are passed into retail prices. Energy and food prices are projected to stabilise in 2026, allowing some moderation in inflation. Uncertainty remains exceptionally high. Ukraine remains dependent on continued international military and fiscal support. Reduced international technical assistance could also slow the pace of reform and improvements in the investment climate, weighing on displaced people’s return.

Foundations for the recovery lie in macroeconomic stability and improving framework conditions

Pursuing the renegotiation of outstanding external public and publicly guaranteed debts and contingent liabilities, and being ready when conditions allow to return the budget to the medium-term objective of small deficits can support the sustainability of the public finances. Narrowing the scope of the presumptive tax regime, along with reducing tax compliance burdens can support revenues and improve the business environment. Strengthening public investment management to improve project quality and implementation will support reconstruction within limited fiscal space. Strengthening the labour market, particularly through access to reskilling programmes and improving working conditions to help war veterans and displaced people reintegrate into the workforce will be central to addressing the demographic challenges aggravated by Russia’s invasion.