“Estimating potential output requires distinguishing temporary shocks from structural changes; failing to do so risks misjudging economic slack and implementing inappropriate macroeconomic policies.”

IMF Staff Note on Potential Output Measurement

In global practice, the key question is whether a crisis constitutes a temporary shock or a structural shift, as this distinction determines how potential GDP is interpreted. During crisis periods — from the Great Recession to COVID-19 — the European Commission, the ECB, and the IMF consistently separated temporary drops in actual output from the long-term trajectory of potential output. This is precisely why, in 2009, the European output gap was assessed at –4% to –6%, and in 2020 at –3% to –5%, even though the actual downturn was sharp and profound. Temporary shocks were not mechanically incorporated into potential output, and subsequent economic policies were designed in a way that aimed to return to the pre-shock “normality”.

Ukraine, however, according to NBU estimates for 2023–2025, records an almost zero output gap: –0,1%, +0,4%, –0,2%. And this raises a fundamental question: if international methodology requires separating temporary constraints from the long-term structural characteristics of an economy, why in our case are wartime factors interpreted as a persistent change in potential output? Why does the NBU treat the state of war as a new normality and effectively consider mobilization and emigration as ordinary market processes?

Let us look at the underlying figures. Employment in civilian sectors is roughly 10% below its 2021 level — this represents around two million workers who are no longer present in the formal economy. Approximately 750 thousand mobilized individuals are temporarily removed from the labor market — this is not a structural trend but a direct consequence of martial law. Capacity utilization is 3% lower than before the war, and the reason is not a “new structure of the economy” but the destruction of the energy system, logistical disruptions, and infrastructure constraints. GDP remains at around 78% of its 2021 level, yet it is difficult to consider this proof that “potential output” has fallen to precisely the same level.

Taken together, these indicators in any crisis-affected economy would be interpreted as temporary, cyclical under-utilization of production factors. But if they are treated as structural changes, potential output automatically “falls” to the level of actual output. The output gap disappears, the recession is statistically transformed into a “new normal”, and the logic of the model leads to the conclusion that the economy does not require any easing and can operate under tight monetary conditions — this is not an opinion but a direct consequence of the model’s internal construction.

The danger of such an approach lies not in policy conclusions as such, but in the loss of analytical capacity to observe the real magnitude of under-utilized labor and capital. If potential output declines in tandem with actual output, the ability to measure the true depth of deviation from a normal level of production — and to assess what the economy could produce in the absence of temporary wartime constraints — disappears. In such a case, the model ceases to distinguish structural conditions from a shock and effectively replaces economic reality with a statistical trend.

International practice suggests the opposite: war is a classic temporary shock that reduces actual output but does not determine the boundaries of long-term potential. The IMF’s quotation above reinforces this point. A refusal to draw this distinction creates the risk of a misdiagnosis of the economy’s condition and its level of slack.

And therefore the key question arises: if the wartime shock is not incorporated into potential output and we do not “lower” potential to match the level of actual production, then what is the true gap between real and potential GDP in Ukraine?