Economic Outlook

2015 was a hard year for the Turkish economy. From the global perspective, the main determinant of this situation was Fed’s preparation for a raise in interest rates for the first time in 9 years. This in turn resulted in Turkey and similar emerging economies to experience capital outflows in an unprecedented size and to be exposed to sharply weakening currencies against US Dollar.

In addition to the adverse conditions in the global environment, regional geopolitical risks, the political uncertainty due to the two election periods and escalating acts of terror were on the agenda of Turkish economy.

However, the economic growth was unexpectedly resistant against this relatively negative performance. In fact, after the unexpected growth in the third quarter, the economy had a considerable growth rate of 3.4 percent in the first three quarters of the year. This suggests that even though there is a slowdown in the fourth quarter, the year could still end up with a growth rate of over 3 percent.

Although growth rates are high, the composition of the growth is quite weak. This means, the growth is mainly driven by consumption and at the investment side which has been weak for quite some time, there are still no signs of lasting recovery.  

Despite this relatively positive picture on the growth side, our familiar vulnerabilities continued in 2015.  Despite the partial relaxation and optimism at the beginning of the year, the inflation (CPI) rate in 2015 is expected at around 8.5 percent.  

A significant slowdown occurred in the current account deficit towards the end of the year. The 12-month total current account deficit of 46.5 billion dollars in December 2014 decreased to 38 billion dollars as of October. We anticipate that the slowdown will continue and Turkey will finish the year with a 32 billion dollars current account deficit. However, considering that nominal GDP in dollars would decline, the current account deficit/GDP ratio is still likely to remain as high as 4.5 percent and above.

Forecasts for 2016

The problems in the global landscape are likely to continue in 2016. The IMF lowered global growth rate forecast for 2016 from 3.8% to 3.6% in its October report. This largely stems from concerns towards the emerging economies. Turkey is unlikely to be exempt from this situation. After Fed’s meeting in December (15-16 December), it is almost certain that Fed will begin to raise the interest rates.

Both geopolitical risks and high level of political tension inside suggests that there may not be a lasting recovery in trust and investments. And with the relative tightening of foreign financing conditions, we expect a slowdown in economic growth in 2016 and to end the year with a growth rate of 2.7 percent. When the ongoing rigidity in inflation is taken into consideration, the inflation rate is expected to be well above the predictions and close the year at 7.2 percent.

Apart from this main scenario, there are two other possible scenarios. A “good” scenario is that, this year the economy could grow 4 percent or more, the inflation rate could stay below 7.5 percent but the current account deficit could continue to stay at high. 

A “bad” scenario on the other hand is that, the economy could become stagnant (0 or negative growth), Turkish Lira could weaken more heavily compared to the main scenario and the inflation could rise much higher.

According to Deloitte’s Economic Outlook Report, the global economy seems to have come to a critical and challenging stage yet again. The growth outlook seems to be weak due to developing countries and the attention is concentrated on China. The volatile and high-risk environment makes it extremely necessary for countries such as Turkey, to strengthen their political and economic conditions and to be well-prepared. 

From the macroeconomic perspective, the main picture of 2015 is depicted as “a relatively resilient growth, sharply deteriorating inflation outlook and although delayed, a current account deficit that started to decline.”   

The developing economies are slowing down rapidly

Although the ongoing deceleration of developing economies is compensated with the limited acceleration of advanced economies, the global economy is somewhat decelerating. The main headlines as well as the risk elements of the global economic outlook seem to be; an ongoing deceleration in China, the trend of commodity prices, stiff capital outflows of the changing economies (thus growing expectations of crisis) and the roadmap of the US Federal Reserve Bank.

Advanced economies are recovering

Recovery continues in the US economy. On the one hand consumption is rising due to relatively strong labor market and the low oil prices; on the other hand production continues to expand in the manufacturing and the non-manufacturing industries. Also optimistic signals are felt in the Eurozone.

In Turkey, growth is above expectations in the second quarter

• Expectation for second quarter was around 3.3% and the actual growth was 3.8%
• The main driver for growth was domestic demand.
• There was an unexpected increase in private sector investments.
• In terms of sectors, the overall picture has been relatively balanced.
• The general trend of growth for the third quarter clearly pointed to a slower pace on a quarterly basis.
• The increase in unemployment rate has been more evident in the recent months.
• CPI is at the level of 7.9% and PPI inflation rose to 6.9%.
• The main reasons behind the inflation in consumer prices are the depreciation of the Turkish Lira, the deterioration of pricing as well as food prices.  
• 24-month inflation expectations reached the worst levels since 2010.
• The Central Bank of Republic of Turkey has taken gradual steps with regards to interest rates and has announced the roadmap for the normalization of the monetary policy.
• Despite the significant decrease in the energy bill, the narrowing of the current account deficit has been delayed due to deterioration of the core balance.
• Both imports and exports were on a downward trend.