Vyacheslav Butko, economist, economic advisor to the Kyiv Security Forum

According to the State Statistics Service, Ukraine’s real GDP growth in 2025 amounted to 1.8%. A steady and noticeable slowdown in growth rates is observed — 5.5% in 2023, 3.2% in 2024, and 1.8% in 2025. The Ukrainian economy entered the current year with real GDP at 79% of the last pre-war year’s level.

For the sake of fairness, it should be noted that even before the war, Ukraine’s economy was in a rather mediocre condition — between 1995 and 2021, the economy spent half of the time in recession; GDP per capita in 2020 was lower than in the pre-crisis year 2007; during 2010–2020, average growth was only 0.5% per year, the lowest in Europe.

Analyzing 2025 in terms of the structure of economic growth, I will highlight the main drivers: gross fixed capital formation (simply put — investment) increased by 10.9%, private consumption rose by 7.5%, and general government expenditures grew by 5.7%. Thus, the increase in total consumption by 13.2% (7.5% + 5.7%) made the largest contribution to GDP growth.

The rise in household consumption expenditures was driven by two factors — wage growth (which provided more funds for current consumption), resulting from labor market shortages rather than increased efficiency and labor productivity, as well as restrained household investment, which is a rational strategy under current risks and uncertainty.

A large share of investment is directed toward the defense sector, including military assistance from partner countries provided in physical form (equipment, machinery, etc.), which is formally counted as part of GDP growth.

The quality of such growth can hardly be considered high for the following reasons:

• if estimates that approximately 50% of the “consumer basket” consists of imported goods are correct, then increased consumption also produces a certain indirect negative effect on GDP growth. This is because “net exports,” i.e., exports minus imports, are one of the components of GDP (the situation is somewhat more complex, since imported components and semi-finished goods become products in Ukraine, but purely consumer imports unambiguously make a negative contribution to GDP);
• an increase in consumption driven by wage growth leads to additional inflationary pressure (incidentally, last year’s inflation can be assessed in different ways: on the one hand — 8% from December of the previous year to December of the year before that, which is more media-friendly and was the focus of public attention; on the other hand — 12.7% for January–December 2025 compared to January–December 2024);
• the external trade deficit, given the impact of the war in the Middle East on fuel and mineral fertilizer prices, is likely to increase, putting pressure on the hryvnia. Depreciation of the currency will accelerate inflation through more expensive imports. In response, households will gradually reduce consumption, which will slow GDP growth;
• the source of increased government spending, as well as higher wages in the public sector and social payments, is international financial assistance. While one would prefer not to doubt its stability, concerns arise due to “Orban’s veto” and uncertainty regarding cooperation with the IMF;
• if we compare capital investments last year (UAH 669 billion) with the last pre-war year (UAH 529 billion), the increase is 26.4%. Against the backdrop of a 52% depreciation of the hryvnia over this period, such growth is difficult to consider a serious achievement, even accounting for the war. A telling fact — the share of foreign investment in total capital investment in 2025 was 0.1%.

A chronic problem is foreign trade. “Net exports” made a negative contribution to GDP growth — exports of goods and services decreased by 12.8%, while imports increased by 8.3%. The reasons are objective. The termination of the EU “trade visa-free regime,” difficult and expensive logistics, destruction of Ukrainian enterprises, and electricity supply issues caused by Russian attacks reduced exports. At the same time, the need to purchase defense industry products following the U.S. refusal to provide military aid, other machinery, as well as automotive fuel, gas, and electricity (also due to Russian attacks on energy infrastructure), along with the need for consumer imports due to the destruction of civilian enterprises, increased imports. The continuation of hostilities and external political factors indicate that these problems will persist, and most likely intensify.

Another negative factor is that companies producing consumer goods face labor shortages, which may lead to a decline in domestic production. The result will be slower GDP growth and additional inflationary pressure, especially against the backdrop of periodic “bursts of generosity” from the government.

As for the prospects of Ukraine’s economic growth: assuming a pause in the war, my estimate of GDP growth over a five-year horizon is closer to the conservative range — approximately 1–1.5% per year (an important note — this refers to average growth over a longer period; in individual years, dynamics may fall outside this range). I lean toward this range for two reasons.

First, the Ukrainian economy demonstrated sustainably higher growth rates only during the “zero” years — before the global financial crisis. At that time, a unique combination of favorable factors emerged. Primarily, exceptionally favorable external conditions for the metallurgical and chemical industries, which formed the basis of exports, along with a massive inflow of foreign capital. Expecting a repetition of this in the coming years would be naïve. Due to shocks in international politics, a negative impact on Ukraine’s economy should be expected — the positive effect of potential increases in food prices, for which Ukraine is a significant exporter, will be offset or even exceeded by the negative effect of declining prices for metallurgical products, rising energy costs, and higher prices for mineral fertilizers.

Second, despite all the shocks of the 21st century, Ukraine’s GDP potential has grown significantly over the past 25 years. However, basic economic growth theory, such as the classic Solow model (where economic growth is driven by physical capital, labor resources, and technology), suggests that as physical capital accumulates, economic growth more often slows down rather than accelerates. Physical capital (machinery, equipment, vehicles, office buildings, etc.) depreciates over time and requires replacement, which demands funds that Ukraine does not have and is not expected to have. Moreover, physical capital itself yields diminishing returns — increasing one factor of production (labor or capital) beyond certain levels leads to progressively smaller gains. If labor supply is held constant — and the number of workers is not unlimited and is steadily declining not only in Ukraine but globally — each additional machine will produce less additional output. In Ukraine’s case, the situation is further complicated by the fact that even if the war stops, there will be no significant inflow of investment or mass return of labor, as both investors and Ukrainian migrants clearly understand the risks of renewed hostilities.

Thus, it is difficult to count on sustained long-term growth without at least improvements in external trade conditions, which are also hard to expect.

So what could be a realistic path toward sustainable and high-quality economic growth? The answer is provided by the main conclusion of the aforementioned Solow model — it is impossible to create sustained economic growth solely through the accumulation of physical capital. No matter how often this is emphasized in Ukraine, focusing only on two issues — investment and labor resources. Sustainable, high-quality, self-sustaining economic growth must be based on something else. That “something else” is technology, production and management innovation, demonopolization of the economy, development of strong institutions, and especially improvements in the quality and productivity of labor.