On Ukraine's GDP and its growth components: an assessment of the situation

In Q2, real GDP growth was 0.7%. This is better than in the first quarter (0.2%), but it is hard to call this growth anything but anemic. The NBU's assessment of the components of GDP growth is noteworthy: private consumption provided the largest positive contribution to GDP growth in Q2 (5.5 percentage points), and growth in household final consumer spending accelerated to 9% year-on-year, up from 1.6% in Q1.

My comments and assessments of the situation and prospects:

Growth through investment would be of higher quality and offer greater prospects for maintaining GDP growth in the long run;

The increase in consumer spending is due to:

• rising wages (more money for current consumption), which is a consequence of a shortage in the labor market, rather than an increase in labor efficiency and productivity;
• refusal of the population to invest, which is a rational strategy in the face of current risks, challenges, and uncertainty;

If estimates are correct that 50% of the consumer basket is imported goods, then increased consumption also has an indirect negative effect on GDP growth ("net exports," i.e., exports minus imports, is one of the components of GDP).

Consumption growth due to higher wages will result in inflation, and the NBU's inflation target of 9.7% for 2025 is unlikely to be achieved.

As companies producing consumer goods face staff shortages, this could lead to a decline in domestic production, resulting in a slowdown in GDP and rising inflation.

The foreign trade deficit will at least continue and is likely to grow, so this will put pressure on the hryvnia, even a slight depreciation of which will accelerate inflation, and households will eventually reduce consumption, which will slow down GDP.

Consumption volatility is higher than GDP volatility (consumption in Q2 increased 5.6 times compared to Q1, while real GDP growth rate increased 3.5 times), and GDP volatility is higher than capital investment volatility (increased 1.3 times in the first half of the year).

In this sense, those who have problems with resources are the ones who will be the first to run out of them. Simply put, investment problems will continue to exist even without the influence of the war factor .

Conclusion:

The current situation looks, to put it mildly, not very optimistic. Given the current trends (the continuation of the war), it is difficult to count on sustainable growth in the long term without at least improvements in foreign trade conditions, which is also very difficult to count on.

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