Macroeconomic situation in Ukraine significantly deteriorated in the first half of the year

The macroeconomic situation in Ukraine is deteriorating amid the absence of significant factors that would contribute to its improvement. Of course, under the conditions of war there are many factors that hinder the revival of economic activity, but we cannot say that since the beginning of the year the overall military and political situation has significantly deteriorated, which could have a drastic negative impact on the economy. Although the destruction of the gas infrastructure can be highlighted, there is no shortage of this resource, although gas has become more expensive due to imports.

Already at the beginning of 2025 it was clear that the Ukrainian economy lacks growth factors that existed in 2023-2024. Approximately from the beginning of the second quarter of last year, the effect of economic recovery after the hardest 2022 and, as a consequence, the low base of comparison, which in 2023 provided record levels of economic growth, was completely exhausted. In other words, the Ukrainian economy has reached the “ceiling” of growth and is not able to get to the “plus” without additional positive structural factors. According to the results of the first half of 2025, we can state that some of the important Ukrainian macro-indicators have gone down.

Negative signals

In the first half of this year, the main business problems remained the same as in 2024

• rising tariffs of natural monopolies for energy and gas supply, as well as the threat of increased cost of railroad freight transportation;
• increased production costs due to rising energy prices and hryvnia devaluation;
• toughening of the problem of staff shortage;
• increased pressure of law enforcement agencies on business;
• insufficient business lending and high cost of borrowed capital due to the level of the discount rate.

Accumulation of these problems has led to deterioration of the economic situation. The first indicators of the Ukrainian economy since the beginning of the year show the failure of the most important economic indicators.

1. Decline in industrial production. This indicator in January-April decreased by 6.1% y/y after growth of 3.6% y/y by the end of 2024. In industry, a slight growth is shown by the food industry, metallurgy, furniture, textiles, cable and chemical products. The growth driver remains everything related to defense products – production of electronic components, finished steel products, construction materials and certain segments of machine building. Domestic defense production provided about a third of GDP growth in 2024.
2. Decrease in construction. In Q1, the volume of completed construction works fell by 11% y/y. This was due to a significant decline in housing (-7.4% y/y) and engineering (-26.6% y/y) construction. It is noteworthy that until recently the construction of engineering structures in the form of reconstruction of various infrastructure facilities destroyed due to the war was an undoubted growth driver for the entire construction industry. One of the factors for the decrease in the volume of infrastructure works was the problems with the allocation of state funding. However, the commissioning of housing in Ukraine in the first quarter increased by 5.2% y/y to 2.3 million square meters, but these are mostly projects started before the war.

At the same time, the volume of industrial products sold in Ukraine in the first quarter of 2025 increased by 15.6% y/y, and the volume of capital investment – by 32.5% y/y, but this growth is largely due to the nominal increase in the national currency or the already known factor of production growth and investment in defense projects.

Other negative signals in the first half of the year include the following:

1. Intensification of industrial inflation. In January-April 2025, producer prices of industrial products increased by 40.4% y/y, including energy resources – by 60.2% y/y.
2. Growth of non-reimbursement of VAT. In January-April, businesses did not receive VAT refunds for UAH 30.4 billion, and in April this amount increased by almost UAH 4 billion.
3. The need to increase budget expenditures. The state budget once again has a “hole” of 400-500 billion UAH. However, the Ministry of Finance promises that everything will be done without raising taxes, only by increasing internal and external borrowings, as well as the administration of taxes and fees and detenization of the economy.

To this we can add the negative impact of external factors – for example, the decline in prices for a number of Ukrainian export products due to tariff wars and high uncertainty in the world economy. As a result – in Q1 2025 the size of Ukrainian exports in monetary terms decreased by 7.4% y/y or by $786 mln – to $9.9 bln.

Stable consumer demand, a significant amount of international financial aid and a better than expected situation in the energy sector remained supporting factors. However, this cannot compensate for the cumulative impact of negative factors.

As a result – a slowdown in Ukrainian GDP growth. The Institute for Economic Research and Policy Consulting (IER) first estimated its dynamics for January-March 2025 at 1.1% y/y, but then worsened the estimate to 0.8% y/y due to the decline in the processing and extractive industries, as well as in the energy sector. The National Bank estimated Ukraine’s GDP growth in Q1 at only 0.5% y/y.

The Ukrainian business climate similarly remains very moderate. The index of business activity expectations in May 2025 amounted to 50.8 points compared to 49.4 points in April. Considering that the neutral level is 50 p., current business climate assessments look cautious, albeit with a hint of optimism, as for the first time in a year, businesses in all sectors expect their performance to grow.

Deteriorating economic expectations

It is expected that the growth rate of the Ukrainian economy in the current year will be in the range of 2-3.3%. At the same time, since the beginning of the year, Ukrainian analysts and international organizations have been adjusting their forecasts of Ukraine’s GDP growth for 2025 towards deterioration. Since January, the NBU has twice worsened its GDP growth forecast for 2025 – to 3.1% from 4.3%. The IMF has also worsened expectations of Ukraine’s GDP growth for the current year to 2% from 2.5-3.5% a few months ago, the EBRD – to 3.3% from 4.7%, and the World Bank – to 2% from 6.5%.

The reasons for the forecast adjustments were Russia’s missile attacks on gas infrastructure, necessitating costly gas imports, increased global uncertainty due to politics and trade wars, and weakening export demand.

In the baseline scenario, all projections assume that the war will last throughout 2025. At the same time, in the case of a stable peace, we can expect an acceleration of economic growth. Dragon Capital estimates that reaching an agreement on a prolonged ceasefire could accelerate Ukraine’s real GDP growth to 3.5-5.5% in 2025.

It is noteworthy that the 2025 state budget is based on a moderate GDP growth forecast of 2.7%, indicating that a realistic approach to budget planning has started to prevail.

Future risk factors

Prospects for industrial production growth remain weak due to high energy prices. At the same time, the outlook for the agro-industry is also not cloudless against the backdrop of export restrictions to the EU and the loss of part of the harvest due to frosts and possible summer drought.

In addition to the above-mentioned factors, deterrents include high uncertainty about the continuation of hostilities, potential risks of strikes on critical infrastructure, lack of real mechanisms to improve the situation with the shortage of personnel and investments.

Potential factors that will affect the Ukrainian economy in the near future include the following:

1. Cancellation of preferential trade regime with the EU for agro-products. According to the estimates of the Ministry of Economy, this may result in the loss of €2.9 billion of agro-exports per year.
2. Introduction of duties on Ukrainian exports by the US administration. Ukrainian exporters of pipe products will suffer most of all.

The escalation of trade confrontations in the world has not yet affected the Ukrainian economy, but in the future it will hamper its recovery, as tariff wars will lead to weakening of external demand for certain products of Ukrainian exports.

An important additional factor is the almost complete absence of state stimulation of the economy under war conditions. It is impossible to expect any significant economic growth without decisive steps aimed at supporting economic activity by stopping the increase in tariffs of state monopolies and solving other pressing business problems, which are of no concern to any of the authorities under war conditions.

Supporting factors will be stable consumer demand, higher harvests, operation of the maritime export corridor and a high level of adaptation of Ukrainian business to the changing conditions of the external environment and, in particular, to the deficit of domestic energy production through the development of distributed generation and electricity imports.

The driver of growth of the Ukrainian economy could be the defense industry, but even in the conditions of war the authorities have not been able to establish effective and affordable crediting of defense enterprises, qualitatively administer the state defense order and open exports, as a significant part of companies in this sector has low utilization.

What to do?

The Ukrainian economy during more than three years of war shows high adaptability and stability, but if incorrect internal management decisions or inaction of the authorities in terms of supporting economic development are added to the existing negative factors, economic activity will decline. Which is already happening!

If Ukraine cannot influence external problems such as lower prices on the world commodity markets, trade wars and uncertainty in the development of the world economy, it is quite possible to support its own business with the help of the existing set of tools.

To effectively recover from the consequences of the war, the Ukrainian economy must grow by at least 6-7% per year. Without a strong industrial base, Ukraine will not be able to recover after the end of the war even to the pre-war level of socio-economic development. Therefore, Ukraine needs systemic support for basic industries.

However, at the moment there are no prerequisites for such growth. Moreover, in case of a decline in GDP dynamics against the backdrop of rising inflation, Ukraine may face stagflation, from which it will be extremely problematic to escape under the conditions of the war.

It can already be stated that the next year promises to be more difficult due to the existing problems in the economy, difficulties with the allocation of international financial aid, which may require cuts in government spending and the remaining uncertainty about the prospects of military action, which restrains any form of investment. Also, there is still no decision on the postponement of the European CBAM for Ukraine, which threatens to collapse exports of a number of basic sectors of the Ukrainian economy (energy, metallurgy, cement industry).