Business is optimistic: why the Business Activity Expectations Index increased in March
1 April 17:28
Despite the challenges of a large-scale war, Ukrainian business demonstrates flexibility, optimism, and adaptability to difficult conditions, positively assessing the current results of its activities in the short term. This conclusion is contained in the March survey of the National Bank of Enterprises of Ukraine, "Komersant Ukrainian" reports.
In March, the index of business activity expectations crossed the neutral mark for the first time in 11 months and rose to 51.8, while in February it was 46.9.
What influenced entrepreneurs’ optimism
The improvement in expectations across all sectors was driven by robust consumer demand, increased production, international financial assistance, stabilized energy supply, and seasonal factors. Employment estimates also improved slightly.
At the same time, the intensification of shelling of critical facilities, exchange rate and inflation expectations, and a shortage of skilled workers remained constraining factors.
Industry factor in the estimates
Steady consumer demand, as well as a further increase in production, led to an improvement in the positive assessments of industrial enterprises regarding their current business activity.
Due to the seasonal factor, construction firms significantly improved their expectations of their performance.
Trade firms were the most optimistic among other sectors about their performance due to a sufficient supply of goods and stable domestic demand.
In March, service firms significantly softened their expectations, but still assessed their business activity the most cautiously among other sectors, given the shortage of skilled workers and rising production costs.
The NBU’s expectations for GDP growth are restrained
In 2024, Ukraine’s real GDP grew by 3.4%, which is less than the NBU’s October forecast. This is stated in the January Inflation Report of the National Bank.
It stated that economic growth slowed compared to 2023, due not only to poorer harvests and slightly weaker-than-expected external demand, but also to the realization of the risks of increased hostilities, intensified Russian air attacks, and the associated electricity shortages. The persistence of high security risks also hindered the return of migrants and caused a significant labor shortage.
Given the security risks and the difficult situation on the labor market, the NBU has lowered its real GDP growth forecast for 2025 to 3.6%. At the same time, the NBU’s baseline scenario still assumes a gradual return of the economy to normal operating conditions. Thus, in 2026-2027, economic growth is expected to moderately accelerate to about 4%.
The effects of the war, which have affected the labor shortage and lack of production capital, are expected to continue to constrain the economy. On the other hand, the recovery will be supported by investments in energy and production facilities, a relatively loose fiscal policy, and growth in private consumption amid rising household incomes.
Inflation figures are not encouraging
In December 2024, inflation accelerated to 12% year-on-year, exceeding the NBU’s previous forecast in its October 2024 Inflation Report. According to the NBU, inflation was also growing in January. The high rate of growth in consumer prices was largely driven by temporary factors, primarily related to the effects of last year’s poorer harvests. At the same time, underlying price pressures were also increasing.
Inflation reaching double-digit levels has a negative impact on inflation expectations of households and businesses. However, thanks to the exhaustion of temporary factors of price pressure and the NBU’s interest rate and exchange rate policy measures, inflation will slow to 8.4% in 2025 and to the 5% target in 2026.
