The ongoing Covid-19 pandemic sets the stage for a prolonged period of uncertainty for world economies.
CommodityThe rise in commodity prices, on the other hand, led to heightened inflation expectations and raised questions over the prospect of a normalization in monetary policy.
Global economy
The ongoing Covid-19 pandemic sets the stage for a prolonged period of uncertainty for world economies
The world economy, which started 2020 with hope with the partial reduction of the trade tension between the USA and China, left behind a year in which it experienced the biggest contraction in economic activity since the Great Depression with the rapid spread of the epidemic that started in China. While the deepest impact of the damage caused by the epidemic was felt in the second quarter, a strong recovery was observed in the economies in the third quarter as a result of the normalization steps taken in addition to the support of extraordinary policy measures.
Although there was a slowdown in the last quarter of 2020 as a result of increasing restrictions, the countries not going to close down as in the first period of the pandemic and the support of the positive performance of China, the locomotive of foreign trade, ensured that the slowdown in growth remained limited compared to the second quarter.
Commodity prices, which fell sharply in the first period of the epidemic, showed a tendency to recover for the rest of the year, with the Chinese economy performing better than predictions, the expectation that the old normal will be approached with the vaccination process, and the global abundant liquidity as well as additional financial incentives on the way.
The rise in commodity prices, on the other hand, led to heightened inflation expectations and raised questions over the prospect of a normalization in monetary policy.
While entering 2021 positive advances regarding the development of vaccines increased hopes for the future, the continued increase in the number of Covid-19 cases and the emergence of coronavirus mutations served as a reminder that the uncertainties would remain with us for some time to come. With the US Presidential election and the Brexit trade deal behind, some of the uncertainty was resolved and expectations for additional incentives remained very much on the agenda, even as the large scale incentives already announced were still being rolled out.
The US Federal Reserve (Fed) stated that its support for the economy would continue.
With the coronavirus epidemic, the US economy, which ended its longest-term growth trend in 2020, experienced the highest contraction since 1946. The deepest impact of the epidemic on the labor market was observed in the US economy, and household spending remained under pressure in 2020 with the weakness in employment. Despite the continued increase in cases, the acceleration of the vaccination process in the country has strengthened the positive expectations for 2021 growth.
The world economy, which experienced a difficult period with the pandemic in 2020, needed strong support from fiscal policies as well as monetary policies. The Fed, on the other hand, anticipated the interest rate to remain close to zero until 2023 and announced high-cost incentives with unlimited bond purchases. In the past year, the USA also put into effect the largest fiscal stimulus package in its history.
As a result the support would continue as the US economy remains a long way from its inflation and employment targets. The Fed’s average inflation target is also expected to provide room for manoeuvre in the face of temporary increases in inflation. With the election of the Biden administration, it was observed that expectations for additional financial incentives got stronger.
ECBHaving announced strong monetary incentives throughout 2020, the European Central Bank (ECB) continued its support by increasing the Pandemic Emergency Purchasing Program in the last month of the year.
In the Euro Zone, Germany continued to be the driving force of the region’s economy.
In 2020, the Euro Zone was the region most affected by the epidemic, led by Italy and Spain, and left behind a year in which deflationary concerns came to the fore with an overvalued euro, weak demand and low energy prices. Manufacturing PMI data, with firms returning to their operations after the relaxation of restrictions in June, tended to recover for the rest of the year, but service PMI data were seen to close the year with a partial weakening as the second wave concerns prevailed in the outbreak.
The emergence of the more rapidly spreading mutated coronavirus in the UK in the final days of the year led to a wave of further restrictions in the new year.
The course of the pandemic suggests that growth in the first quarter of 2021 could come under pressure, especially in the service sector. However, German manufacturing PMI data performed strongly in the final quarter of the last year, reaching its highest level since February 2018 and continuing to underpin the region’s economy. With the more positive outlook in Europe’s manufacturing industry, Turkey posted record export growth in the fourth quarter This positive trend in our export outlook offers a ray of hope for this year with economies expected to recover.
Having announced strong monetary incentives throughout 2020, the European Central Bank (ECB) continued its support by increasing the Pandemic Emergency Purchasing Program in the last month of the year.
One of the determining factors on the agenda of 2020 has been the Brexit trade agreement, and in the last days of the year, a consensus was reached between the UK and the European Union. Turkey also signed a free trade agreement with Britain to ensure the continuation of current trading conditions in agricultural and industrial products. While our foreign trade relations with the UK, which is our second largest export market, are expected to strengthen further, the arrangement of the agreement to take account of current conditions with the prospect of new areas of cooperation stand out as an advantage.
China staged a return to its pre-pandemic levels of growth in the last quarter of 2020.
China, the world’s second largest economy, which managed to quickly eliminate the effects of the epidemic in an environment where trade disputes with the USA continued, ended the year 2020 with positive growth. The country, which contracted by 6.8% in the first quarter of 2020, exhibited a strong recovery trend for the rest of the year and posted a positive message for 2021 by registering growth at pre-pandemic levels in the last quarter of 2020.
Despite the low interest and abundant liquidity environment in 2020, portfolio flows towards developing countries (EM) followed a volatile course. In the early days of the pandemic, there was a sharp exit from the developing countries’ stock and bond markets, while bond-based capital inflows to developing countries started as of May. The availability of the vaccine in November and the finalization of the US elections supported the entry into the stock markets.
With the expectation that developed countries would press ahead with their ultra-expansionary policies, capital flows to emerging countries are expected to continue this year as well. There is an expectation of more predictable implementations in trade policies as well as the establishment of new commercial blocks which could support global trade
Having made a strong start to 2020, economic activity in Turkey appeared to slow down owing to the effects of the epidemic from mid-March on.
The Turkish Economy
Turkey’s economy is expected to maintain its strong growth.
Having made a strong start to 2020, economic activity in Turkey appeared to slow down owing to the effects of the epidemic from mid-March on. With the spread of the epidemic, measures have been taken to minimize the negative effects on the economy. The fiscal policies implemented were in line with the monetary policy and in an expansionary direction.
Economic RecoveryTurkey, in 2020 has been one of the few economies in the World to close the year with growth. Turkey’s economy in the first quarter of 2020, partially affected by the epidemic grew 4.5%.
With the gradual normalization steps and the monetary and fiscal measures put into practice, it was observed that the economic indicators started to recover as of May.
As inflationary effects became evident with the increasing domestic demand, the CBRT strengthened its tightening policies against the upside risks in inflation and determined a simpler monetary policy framework.
Inflation was high in the last quarter of 2020 with the cumulative exchange rate effects and the rise in global commodity prices, with inflation ending the year at 14.6% - higher than the Central Banks’ year-end forecast. Inflation is expected to remain high throughout the first half of 2021 before following a downward trend by the second half of the year. In addition, it is predicted that in 2021, with the contribution of both the CBRT’s tightening monetary policy and global liquidity conditions, the exchange rate will display a stable outlook, which will increase the tendency to domestic savings in TL, contribute to the balancing of domestic demand and alleviate inflationary pressures.
Turkey, in 2020 has been one of the few economies in the World to close the year with growth. Turkey’s economy in the first quarter of 2020, partially affected by the epidemic grew 4.5%. The economy, which contracted by 10.3% in the second quarter due to the restrictions, recovered as of the third quarter as a result of the measures taken and grew by 6.3% annually. With an annual growth of 5.9% recorded in the fourth quarter, it ended 2020 with a growth of 1.8% with the contribution of consumption, investment and stocks.
Despite the existence of tightening financial conditions, it is considered that both the initiation of the vaccination process and the continuation of global expansion policies can partially alleviate the pressure on growth. This year, the recovery is expected to come to the fore with the contribution of the base effect in the second quarter. Especially with the expected positive developments in the tourism sector, it is thought that the recovery in economic activity will accelerate under the leadership of the service sector, which was deeply affected by the epidemic in the second half of the year.
Under these circumstances, it seems possible for us to reach our potential growth in 2021. In 2020, the sum of incentives and support packages provided within the framework of the expansive fiscal policy pursued to limit the impact of the epidemic on economic activity approached approximately 10% of the national income. The budget deficit / GDP ratio realized as 3.4% in 2020, remaining below the NEP target of 4.9%, as a result of the contribution of tax revenues strengthened by the previous gains in the budget balance and the growth performance better than expected.
There is a strong expectation that fiscal discipline will not be compromised in 2021, with the exception of spending on the outbreak.
The current account surplus, which was recorded in the second quarter, turned into a current account deficit due to the decline in exports as a result of the closures and the weakening in tourism revenues due to travel restrictions. With the easing of quarantine measures in the third quarter, the recovery in exports of goods became evident. However, the current account deficit continued its course due to the widening foreign trade deficit due to deferred demand and the increase in gold imports and weak tourism revenues. Thus the Turkish economy’s 6.8 billion US dollar current account surplus in 2019 turned into a 36.7 billion US dollar deficit in 2020.
For 2021, the increase in imports is expected to slow down on the back of tightening policies with gold imports set to ease back as the dollarization trend diminishes. With the national vaccination rollouts gaining pace, tourism revenues are expected to record a strong recovery this year, paving the way for a significant narrowing in the current account compared to the previous year.
Due to the high uncertainty brought about by the epidemic in 2020 and the increasing restrictions, the labor market was under pressure, especially due to service sector employment. While the impact of the epidemic on the employment market was felt strongly in the second quarter, the recovery observed in economic activity in the second half of the year helped to compensate some of the employment loss. Measures such as short-term work allowance and 3-month dismissal ban put into practice by the government have been determinant in limiting the increase in unemployment rate. Despite the tightening financial conditions, the fact that exports start 2021 with a strong strength is considered as a factor that will support growth and employment through the industrial sector.
