GrowthTurkish economy grew by 4.5% in the first 9 months of the year and the annual growth is expected to be around 3-3.5% for 2018.

Turkish economy reshaped its growth composition despite the slowdown of economic activity in 2018.

In 2018, global economy has been shaped by protectionism in world trade, slowdown of economy becoming more evident in Euro Zone countries, uncertainties in UK’s exit from EU and volatility in developing countries.

US economy exhibited a strong growth performance supported by its monetary policy in 2018. With the lowest rate of unemployment of the last 50 years, US Central Bank (Fed) realized 4 interest hikes. By doing so, Fed increased interests by 225 base points since 2015 when interest hiking cycle has begun. In an environment where Fed’s independency is being questioned, although it reduced the expectancy of number of hikes in 2019 from 3 to 2 in its December meeting, it has not assumed a dove attitude as expected by the markets. In addition to that, Fed is expected to reduce its balance sheet every month. As we enter into the first days of 2019, Fed seems to follow a more moderate policy compared to December and this caused markets to catch a breath. Fed President Jerome Powell’s message stating that they will be more flexible and patient in their monetary policy steps reinforced the expectations of Fed’s taking a break from interest hikes in 2019.

In Euro Zone, 2018 has been a year when slowdown of economic growth became more evident. Concerns around budget deficit and public debt stock in Italy, temporary activity loss in automotive sector in Germany and developments in UK’s exit from EU has been determinant factors to decrease global risk appetite for that region. Current indicators throughout the Euro Zone points out downward risks will continue in 2019. This indicates that the moderate slowdown in this region will continue for a longer time than expected. Both slowdown of growth and decline in oil prices resulting in actual inflation being distant from the target shows that ECB will continue its support to the economy. In brief, it is more likely that ECB will keep interests at the same level until 2020 as it has been doing since 2011.

Inflationinflation ended the year with a rate of 20.3% in line with the inflation forecast in the New Economic Program.

With fluctuations in risk appetite due to above mentioned risks, capital inflow to developing countries has clearly decreased compared to 2017. Capital outflow from these countries suppressed local currencies against USD and this has set the base for following tight policies by the central banks of some of the developing countries. Fluctuations in some countries which have higher levels of macroeconomic vulnerability, such as Argentina, increased the sensitivity of other developing countries.

In addition to these developments, impacts of normalization trends in monetary policies by Central Banks of developed countries, such as Fed, on long term interests have been clearly perceived in 2018. With the tightening of the financial environment US 10-year bond interest has increased from 2.45% at the beginning of the year to 3.23% in mid-November. However, with increased concerns around global growth, interest for the same maturity bond decreased below 3% at the end of the year. The partial relief in interest of US 10-year bond, which is considered as risk-free interest rate, somewhat reduced the pressure on Central Banks of developing countries towards the end of the year. In a conjuncture where trade tensions generate risk for investment and a secure environment, Central Banks of developed countries are expected to take steps toward supporting the global economy. It is anticipated that this situation may have positive reflections on developing countries’ economies including Turkey and may partially decrease vulnerabilities.

With the guidance of the New Economic Program, there is strong consensus on 2019 creating a base for a high quality growth in accordance with the soft landing scenario.

Turkish economy reshaped its growth composition despite the slowdown of economic activity in 2018. With the increased tightening in financial conditions, contribution of domestic demand on growth decreased. Despite this outlook, net exports replaced domestic demand thanks to positive trend in foreign demand and flexibility of our exporters in terms of market diversification. Turkish economy grew by 4.5% in the first 9 months of the year and the annual growth is expected to be around 3-3.5% for 2018.

With tightening financial conditions, portfolio exit in developing countries became clearer and the magnitude of fluctuations in Turkish Lira assets have gone up one more level by the impact of currency shock. Experiencing a high level of volatility in exchange rates, Turkish economy has left behind all these fluctuations thanks to a series of cautions taken by the authorities. Central Bank also reduced the volatilities in financial markets with its strong monetary tightening policies and by the end of September, recovery trend in TL has become more apparent.

With the guidance of the New Economic Program, there is strong consensus on 2019 creating a base for a high quality growth in accordance with the soft landing scenario. It is expected that economic stabilization will continue in the first half and with the base effect and contributions of the tourism industry, recovery will be more evident in the remaining part of the year. As a result of competitive exchange rate levels and slowdown of domestic demand, current account balance in 2018 is anticipated to improve by approximately USD 15 billion compared with 2017. The outlook for 2019 is that improvement of current account balance will continue and this improvement trend will have a positive effect on country risk premium.

Inflation peaked in September and reached the highest level since 2003. However, with the increase in value of TL, impacts of Total Fight against Inflation, SCT (Special Consumption Tax) and VAT reductions, inflation tended to decrease and ended the year with a rate of 20.3% in line with the inflation forecast in the New Economic Program. It is expected that financial and monetary policies will be in harmony in 2019 and the inflation rate at the end of the year will be close to the forecast in the New Economic Program.