The year 2016 was marked by the political developments in the US and Europe, as well as the economic recovery in developed countries after the global crisis.
Fed, ECBFED AND ECB MAINTAINED A SUPPORTIVE STANCE AGAINST THE LIKELY FRAGILITY IN THE RECOVERY PROCESS.
Outlook for the world economy
The year 2016 was marked by the political developments in the US and Europe, as well as the economic recovery in developed countries after the global crisis. The raft of strong data releases from the US and European economies continued throughout the year. The Federal Reserve (Fed) and the European Central Bank (ECB) maintained a supportive stance against the likely fragility in the recovery process. The ECB extended its quantitative easing program until the end of 2017, while the Fed raised interest rates only once during the year. However, it was political developments that took precedence over economic developments in both continents. The presidential elections in the United States and the UK’s exit process from the European Union (Brexit), along with the referendum in Italy all increased volatility in the markets. The rally in commodity prices, especially oil, supported the industrial sector by raising producer prices and ensuring that commodity exporters also positively decoupled.
The US economy continued to post moderate growth during the year, with further growth in employment without apparent inflationary pressures. Backed by the robust position of the US economy, the Fed endorsed a quarter point increase in interest rates, in spite of the increase in uncertainty that followed the presidential election in November, with 2016 rounded off with one interest rate hike, as in 2015. After the election of the new president in the US, there was a sense that uncertainty over the country’s politics would remain, especially when it comes to foreign trade and finance and this increased volatility in the global markets. Mounting expectations that expansive fiscal policies would be implemented in the economy, stimulating growth, boosted the view that the Fed would tighten its monetary policy more rapidly than what had been foreseen, precipitating a significant uptrend in inflation expectations and bond yields, with the USD gaining against other currencies. The jump in yields on US 10-year bonds, widely referred to as risk-free interest rates, ushered in a wave of selling in global bond markets and sparked capital outflows from developing countries along with significant increases in bond yields in these countries. Against such a backdrop, the increase in global interest rates could lead to a tightening of financial conditions in a number of countries. Protectionist foreign trade policies have raised question marks over the future of international trade agreements. There could be pressure on growth rates and employment in North America and in Asia, which are part of the US value chain, if protectionist policies are placed on foreign trade. Therefore, the normalization of the Fed’s policy will depend on an expanding fiscal policy in the US and foreign trade policies in 2017.
Political developments in the Eurozone left their mark on 2016, which saw heightened concerns over the region’s banking sector with a spate of reports concerning Eurozone-based banks, mainly Italian banks and Deutsche Bank. With some negative interest rates in the region, interest income has come under pressure, leading to low profitability for banks. Low profitability and the ratio of problematic loans remain sources of concern for the banking sector in the region. Although the immediate fallout in global markets to the UK’s referendum vote to leave the European Union was short-lived, the markets will be keeping a very careful watch on how the relationship between countries pans out in the medium term, given the commercial and financial importance of relations between the UK and the European Union. Following the Brexit decision, the Bank of England (BoE), which has been following an accommodative policy towards the economy, lowered its policy rate to its lowest level since 2009. The fall in the pound, due to uncertainty and rising oil prices, has set UK inflation on a course to exceed the 2% target in the medium term. Despite inflationary pressures, the BoE is expected to maintain its accommodative monetary policy aimed at supporting the economy in anticipation of the volatility that is expected during the process. With two important elections scheduled in 2017 in Germany and France, the two biggest economies of the Eurozone, the ECB extended its asset purchase program in the December meeting, with the program set to continue until the end of 2017 with the aim of protecting the markets and economic activity against any potential uncertainty resulting from the elections. The ECB also signaled that it would normalize its monetary policy over a reasonable time scale by reducing the monthly purchasing amount from EUR 80 billion to EUR 60 billion. Within rising inflation with the impact of energy prices and recovery in production-driven economic activity, the ECB is expected to maintain its asset purchase program in its current form for some time in this election year. European voters are expected to vote to prevent populist parties from coming to power in the elections, although these parties may well see some increase in their support as voters express their reactions to the governing parties.
Meanwhile China underwent the painful transition period from export and investment-based growth to a consumption-based growth model. The extent of volatilities arising from Chinese data releases eased considerably in 2016 with markets adjusting to China’s new normal, which can be summed up as a lower rate of growth. The recovery in commodity prices kept China’s Producer Price Index (PPI) data in positive territory after a long break, marking the end of the deflationary spread between China and the rest of the world. The increase in profit margins is expected to support the manufacturing industry In addition, commodity prices, especially oil, have risen significantly, following China’s supply limitations that has demonstrated balanced and stable growth, as well as OPEC and non-OPEC members. Commodity exporters such as Brazil, South Africa and Indonesia decoupled positively among emerging economies on the back of the rise in commodity prices during 2016. A continuation of the trend in commodity prices would help limit the deterioration in the budget balances of commodity exporters while contributing positively to global economic activity by supporting their growth. On the other hand, the increased protectionism in foreign trade in 2017 is causing a concern in global markets, especially in China and Mexico.
CBRT continued its monetary policy simplification steps, which began in March 2016, with moderate and cautious steps until September due to the decline in inflationary pressures.
Outlook for the Turkish economy
The Turkish economy was buffeted by domestic and geopolitical developments, as well as turbulence in global markets during 2016. The expectation that a more stringent monetary policy would be pursued in the US after the presidential election precipitated a wave of portfolio outflows from developing countries, including Turkey. Compounded by the decisions taken by credit rating agencies, TL negatively decoupled from peer currencies. However, the CBRT sought to balance the risks in the short run with the liquidity steps it implemented. A combination of macro-prudential and structural policies along with strong fiscal discipline is expected to return the economy to an even keel in the medium term.
Despite the extraordinary developments and shocks experienced during the year, the Turkish economy managed to post a modest degree of growth in 2016. The economy, which is estimated to have posted some degree of a recovery in the last quarter, is expected to maintain a moderate recovery in 2017 with the support of incentives and measures. A manageable increase in credit growth, supported by a revival of consumer credits and commercial credits in TL terms, is expected to support domestic demand with the uncertainties left behind and the economy will return to a stable growth course.
Despite the rise in commodity prices and contraction in the tourism sector in 2016, the current account balance remained similar to its 2015 level, with the positive trend of foreign trade limits. While it is thought that the recent depreciation of the TL would have had a positive reflection on exports, our exporters did not lose their ability to diversify markets, providing us with a greater degree of flexibility when compared to similar countries. Exports are expected to be buoyed by the continued growth in demand from the European Union countries and normalizing relations with neighboring countries. The tourism sector is expected to benefit from the possibility of improved relations with Russia, although geopolitical developments will have an important bearing on trends in tourism.
8%CBRT EXPECTS INFLATION OF AROUND 8% IN 2017.
At the end of 2016, consumer inflation exceeded the CBRT’s 7.5% inflation forecast, mainly due to the cumulative effect of exchange rate movements and tax adjustments. The weaker TL and higher commodity prices created upward pressure on inflation. Based on current projections, the CBRT has revised its inflation forecast upwards from 6.5% and expects inflation of around 8% in 2017. Movements in the foreign exchange market, food prices and developments in demand conditions are the main determinants of the course of inflation this year.
CBRT continued its monetary policy simplification steps, which began in March 2016, with moderate and cautious steps until September due to the decline in inflationary pressures. In the framework of simplification steps, CBRT had lowered upper boundary of the corridor by a total of 250 basis points by September, leaving the corridor at its narrowest ever level. CBRT then interrupted the simplification process, taking the view that the excessive exchange rate volatility amid mounting uncertainty following the US presidential elections would cause upward risks on inflation and turned its attention to policies intended to support the TL by implementing monetary tightening. As well as increasing the cost of borrowing for the TL to a limited extent, it also aims to support the TL with a dynamic reaction through various applications within the foreign exchange liquidity management.
