The Fed’s long-anticipated interest rate hike finally arrived in late 2015 while the European Central Bank continued to pursue expansionist monetary policies on the grounds that economic recovery in the Eurozone was still too weak and inflation was too low.

Outlook for the World Economy

2015 was a year in which the process of recovery became quite apparent in the US economy whereas elsewhere growth lost momentum and monetary policies diverged in both developed and developing countries around the world.

2015 began with expectations that the US Federal Reserve Bank would begin raising interest rates once again during the year, that both Europe’s and Japan’s central banks would continue to adhere to expansionist monetary policies, and that geopolitical risks arising from disputes between Russia and the West would remain high on the world’s agenda. The Fed’s long-anticipated interest rate hike finally arrived in late 2015 while the European Central Bank continued to pursue expansionist monetary policies on the grounds that economic recovery in the Eurozone was still too weak and inflation was still too low. While various embargoes continued to be imposed on Russia all year long, the geopolitical risks arising from violence in Iraq and Syria were never far from sight. Weak demand stemming from inadequate global growth and the unwillingness on the part of oil-producing countries to rein in supply triggered sharp declines in oil prices. The contraction in commodity prices owing to weak growth in the Chinese economy exerted pressure on emerging markets as they watched their exports shrink.

The recovery in the US economy continued and even gained momentum in 2015. Expectations that the Fed would begin the process of raising interest rates once again were nourished by improvements in growth figures, by wages increasing faster than inflation, and by a strong (200,000+) rise in average one-month non-agricultural employment numbers that reduced the unemployment rate to levels not witnessed since the start of the 2007-2008 global financial crisis. Ostensibly, inflation ought to have been the only issue prompting questions about higher interest rates; but in the Fed’s view, the current low level of inflation was due to external factors -in this case low commodity prices in general and the collapse in oil prices in particular-and the bank therefore decided that the time had come for its first interest rate hike in nearly ten years: in December the Fed announced it had raised its prime rate by 25 basis points.

In the Eurozone, economic recovery remained weak due to low inflation, mainly caused by depressed commodity prices, and due to inability of the emerging economies to restart growth.

Long before the advent of its rate hike, the Fed sought to ready markets for it through a calculated forward guidance strategy in which the bank frequently repeated that the rise would be both gradual and slow. Thus because markets began pricing an impending Fed rise as early as the beginning of the year, when the increase finally did come in December their reaction was not very strong. Expectations are that the Fed will continue raising interest rates gradually in 2016 but that the pace of this rise will be determined by macroeconomic considerations, foremost among them being inflation.

For Europe’s economy as a whole, 2015 was a difficult year indeed. For quite a long time the most serious issue on the continent’s agenda was the latest Greek debt crisis. A process in which Greece’s abandoning the euro became a real possibility and the EU’s monetary and fiscal policies were stridently criticized eventually culminated when a new Greek government that had been voted into power with a mandate to oppose austerity agreed, after prolonged and acrimonious negotiations, to a plan to restructure the country’s mountain of debt.

The European Central Bank maintained its expansionary stance throughout 2015. In March it initiated a program in which the bank committed itself to buy EUR 60 billion worth of bonds every month until September 2015. It was expected at the time that this would add about EUR 1.1 trillion to ECB’s balance sheet. However when inflation remained low due mainly to depressed commodity prices and economic recovery among the emerging economies remained weak due mainly to their inability to restart growth, the bank announced in December that its asset purchases would continue at least until March 2017.

As far as Europe is concerned, it is generally expected that 2016 will be another year in which inflation will again be too low and structural problems like high unemployment will again be opined upon.One of the issues most talked about in 2015 was China’s inability to demonstrate an adequate growth performance and contingently the impact that this would have especially on emerging economies. From the double-digit rates of annual growth to which it had become accustomed in the early 2000s, the Chinese economy slipped to a 6.9% growth rate in the third quarter of 2015, the lowest witnessed in fifteen years. This slowdown in what is the world’s second biggest economy significantly depressed the global demand for commodities whose prices, along with that of oil, continued to decline all year long.

The numerous Asian, Oceanian, and Latin American countries that are among China’s biggest trading partners suffered from this downturn in the Chinese economy. Growth-related worries also plagued Chinese bourses, where sharp declines in equity prices led to concerns in global markets in the year’s second half. China is currently attempting to turn its economy away from export-based growth in favor of one that is more services-oriented and driven by domestic demand and consumption. The country’s efforts in this direction can be expected to continue in 2016.

Owing both to the slowdown in the Chinese economy and to the reluctance of oil-producing countries to cut back output, oil prices fell by 35% in 2015. This sharp decline in the price of oil made life especially difficult for oil-exporters like Russia and Brazil, whose currencies depreciated significantly.

For Middle Eastern countries whose revenues are mostly if not entirely dependent on oil exports, the collapse in oil prices has brought fiscal policy to the point of ruin in some cases. In light of the weakness of global growth, it seems likely that the global oil glut will continue and that oil and other commodity prices will remain depressed for yet some time to come.

As was the case in other developing countries, 2015 was a year in which the Turkish economy was impacted by global economic developments. In the face of such adversities however, it still managed to register growth.

Outlook for the Turkish Economy

As was the case in other developing countries, 2015 was a year in which Turkey’s economy was impacted by global economic developments. Suffering from exacerbated geopolitical risks owing to developments in the country’s immediate neighborhood and from inflation brought on by food price rigidities and by erosion in the value of its currency, the Turkish economy still managed to register growth in the face of such adversities.

2015 began with risk perceptions concerning developing countries deteriorating as expectations grew stronger that the US Federal Reserve Bank was about to raise interest rates. The realization that any normalization of the Fed’s monetary policy would mean the end of loose money and that this in turn would make it harder and/or more expensive for countries like Turkey to finance their current account deficits fueled concerns about developing countries. Such concerns, which occasionally set markets aquiver, were happily assuaged once it was made clear when and how fast the Fed would begin raising its rates. For much of the year however, Turkey’s country risk perceptions were heightened by the adverse impact that the slowdown in the Chinese economy was presumed to have on emerging economies and by the increasingly more severe regional geopolitical risks to which the country found itself exposed.

Owing to the beneficial impact that a strong currency and weak commodity prices had on import costs, the current account deficit gradually narrowed during the year. For the first time in six years, Turkey’s one-month current account showed a surplus in 2015 while its ratio to GDP fell to below 5%. Although the strength of the Turkish lira did constrain growth somewhat by depressing domestic demand, the Turkish economy nevertheless outperformed expectations. In a year in which exports’ net contribution to growth was negative because of problems in the global economy and currency mismatches, growth dynamics were provided mainly by domestic and public-sector consumption.

Turkey’s foreign trade performance last year was certainly not helped by the fact that the country’s export revenues are priced largely in euros while its imports are priced largely in dollars. But the conjunction of a strong USD and a weak EUR was only one of the reasons why exports’ net contribution to growth was negative in 2015: unwantedly weak economic recovery in Europe and economic hardships in neighboring countries like Iraq and Russia also hampered Turkey’s exports as well.

Both the pass-through effect of a 20% loss in the value of the Turkish lira in 2015 and soaring food prices drove inflation to levels well above TCMB’s projections much less its targets. What with the structural measures that the bank has since taken it is thought that inflation will begin to subside in 2016 and move towards the 7.50% target set in the Medium-Term Program, though this will also be dependent on market conditions being less volatile.

Overshadowed by global uncertainties as to the direction of monetary policy from the very beginning of the year, during the first two months of 2015 TCMB lowered both the upper and lower boundaries of its one-week repo rate corridor and was also expected to continue reducing interest rates thereafter. The bank was prevented from taking any further monetary policy action for the rest of the year however by erosion in the value of the lira and by high levels of inflation. In August TCMB announced that it would be taking steps to “simplify” monetary policy while also stressing that this was contingent on (1) the Fed’s starting to raise its interest rates and (2) a durable reduction in global volatility.

Despite a second round of parliamentary elections in 2015 made necessary by the inability of any party to secure a majority or form a coalition in the first, public finance policy implementation remained consistent and disciplined without any serious interruption in the trend towards improved budget performance. This commitment appears to be continuing.

While the point that oil prices reached in 2015 was good for our own country, cheap oil did put the global economy’s growth problems firmly on the agenda. With the Fed having begun to normalize its monetary policy and in view of developments in the Chinese economy, 2016 can be expected to be a difficult year for developing countries in general though ECB’s continued adherence to expansionist policies may have a positive on our country’s economy, not least on its export trade. Likewise the structural reform package announced by the government should engender enduring benefits in the medium and long terms by providing opportunities of consistent and sustainable growth and a macroeconomic framework compatible with it.