European Commission worsens forecast for Ukraine's GDP growth to 1.6% in 2025, to 1.5% in 2026

The European Commission (EC) has worsened the forecast for Ukraine's GDP growth in 2025 to 1.6% from 2.0% expected in May this year, and in 2026 - to 1.5% from 4.7%, according to a document published on Monday.

"Growth weakened in the first half of 2025 as intensified attacks on critical infrastructure disrupted energy supply, while agricultural output fell… The prolonged war is set to weigh on domestic productive capacity throughout 2026 with growth projected at 1.5%, before rebounding to 4.7% in 2027 when reconstruction efforts are expected to start in earnest," the document notes.

Last year, it forecast 2.8% GDP growth for Ukraine this year and 5.9% in 2026.

The European Commission expects domestic demand to remain the main driver of growth, fueled by rising real wages and private consumption. Continued defense spending and ongoing emergency repairs and reconstruction will also drive investment growth.

The document projects that the weighted average inflation rate will increase from 6.5% last year to 13.1% in 2025 (compared to an expected 12.6% in May) due to rising food, energy, and labor prices. However, it is expected to decline to 9.8% in 2026 and 7.7% in 2027.

Continued spending needs are expected to keep the state budget deficit high throughout the forecast period through 2027. The deficit is expected to increase to 23.8% of GDP this year, up from 18.1% last year.

"New fiscal measures—including efforts to reduce informality in customs, a temporary increase on the tax on bank profits to 50%, and the introduction of a tax on digital platforms—are expected to yield around 1.8% of GDP in additional revenues. Coupled with continued high nominal GDP growth, the deficit is projected to narrow to 21.2% of GDP in 2026," the European Commission reports.

Relentless Russian attacks on energy infrastructure and unfavourable weather conditions affecting agricultural output contributed to supply-side constraints that drove up imports and reduced exports. The European Commission forecasts a 2.4% decline in exports of goods and services this year, while imports are expected to increase by 5.8%. Exports are expected to recover by 2.9% next year as agricultural production returns to normal. However, strong demand for imports of energy, coal, and defense and reconstruction materials will cause imports to grow by 5.3%.

The document notes that large-scale population movements and military conscription have significantly reduced the labor force since the start of the invasion, leading to acute shortages that outpace average nominal wage growth in the first half of 2025. Labor shortages are expected to persist due to slow reintegration, the war's lingering impact on the labor force, and persistent regional and skill mismatches. Consequently, the unemployment rate will remain high throughout the forecast period but will gradually decline from 14.8% last year to 13.3% this year and 12.9% next year.