Two scenarios for the economy: Dragon Capital has updated its forecast for 2025
13 May 2025 16:28
Real GDP growth in Ukraine this year may range from 2.5 to 5.5 percent, and this figure depends on the next “war scenario.” Such a conclusion can be drawn on the basis of the updated macroeconomic forecast for 2025 from the investment company Dragon Capital, which was released today, reports
As noted in the report, the company’s analysts were guided in their estimates by the possibility of two scenarios in 2025.
The “ongoing war” scenario assumes the continuation of hostilities until the end of the forecast period.
The “ceasefire” scenario assumes that a sustainable ceasefire will be achieved in the coming months, but part of Ukraine’s territory will remain temporarily occupied.
Economic growth will depend on the war scenarios
In the “ongoing war” scenario, the forecast for real GDP growth in 2025 is lowered by 0.5 percentage points to 2.5%. Private consumption and the development of domestic military production will remain the main drivers of growth, while the shortage of skilled labor will continue to limit the economy’s potential.
If a lasting ceasefire is agreed upon, real GDP may grow by 3.5-5.5% yoy (0.5 percentage points lower than previously expected), thanks to improved economic sentiment and the start of large-scale reconstruction, which will offset the reduction in defense spending.
Inflation will slow down
In April 2025, consumer prices increased by 15.1% yoy, but despite the acceleration of annual inflation, certain indicators indicate a gradual easing of underlying inflationary pressures, in particular due to the exhaustion of the effect of rising business costs for electricity.
Dragon Capital analysts predict a slowdown in consumer inflation to 8.1% yoy by the end of 2025 in the “ongoing war” scenario and to 9-10% yoy in the “truce” scenario.
The budget deficit should be reduced
The budget deficit in 2025, according to Dragon Capital, may be reduced to $40 billion (20% of GDP) from $44 billion in 2024, mainly due to tax changes adopted at the end of 2024, which will generate an additional $3 billion in tax revenues.
However, it is likely that this year’s budget will have to be revised and defense spending will have to be increased due to the reduction in US military support and the enemy’s increased military spending. And it is possible that, despite the liquidity buffers, additional defense spending will require new revenue mobilization measures and increased domestic borrowing.
At the same time, in the event of a sustainable ceasefire, the budget deficit, according to the company’s experts, could shrink to $34 billion, or 16% of GDP.
NBU reserves will grow, while the hryvnia will weaken in a controlled manner
In Q1 2025, the NBU allowed the hryvnia to strengthen against the US dollar by 1.4% to UAH 41.5/USD. This is after a long period of controlled devaluation. The strengthening of the hryvnia was the NBU’s response to high inflation, significant external financing, the global weakening of the dollar and the seasonal decline in demand for foreign currency.
Dragon Capital analysts expect the NBU to return to a controlled and gradual weakening of the hryvnia in the second half of the year, when inflation rates begin to decline.
Given the significant amount of financial assistance, the NBU’s reserve forecast has been raised to $59 billion (from $41 billion), and the exchange rate forecast for the end of the year has been lowered to 44 UAH/USD. (minus 4.4% yoy, compared to the previous forecast of 45 UAH/USD).
The achievement of a sustainable ceasefire will contribute to a slower devaluation of the hryvnia in the second half of the year.
As a reminder, the European Bank for Reconstruction and Development released its economic report today, in which it revised its forecast for Ukraine’s economic growth for 2025 and lowered it to 3.3%.
The previous report, published in February, forecasted growth of 3.5% in 2025.
At the same time, the EBRD’s Regional Economic Outlook report, also published today, forecasts Ukraine’s real GDP growth in 2026 at 5 percent. However, this forecast is, as noted, subject to a ceasefire and the benefits of post-war reconstruction.
