Real GDP is estimated to grow by 1.4% in 2016 due to domestic demand growth. Purchasing power of Ukrainians increased primarily due to higher wage income as wages started to catch up with inflation observed in 2014 and 2015. Real gross fixed capital accumulation surged as long-delayed investment plans were finally put into action, the Government financed most urgent infrastructural and defence projects. Housing in larger cities remained in deficit prompting investment from households. At the same time, net real exports made negative contribution to the growth as external demand was weak and increase in domestic demand prompted recovery in imports.
According to our baseline scenario real GDP in 2017 is forecasted to growth by 2.6% due to further increase in domestic demand. Real private final consumption is expected to be supported by surge in minimum wage and gradual improvement in consumer confidence. Companies will allocate more money for labour costs, but will still finance the urgent modernisation projects. Stronger domestic demand will result in higher imports. Exports is forecasted to grow slower than imports. Still, balance of payment is expected in surplus and exchange rate volatility is expected to be moderate for the biggest part of the year.
We expect consumer sentiment and business confidence to continue improving in 2018. Reforms introduced in 2014-2017 are expected to reduce friction in the economy. However, political instability will likely remain a challenge while war in the Donbas and conflict with Russia will likely remain a drag on economy. Global economic growth is also expected to remain moderate. As a result, real GDP is forecasted to increase by 3.4% in 2018.
