AS GLOBAL ECONOMIC ACTIVITY EXCEEDED PROJECTIONS IN 2021, INFLATIONARY RISKS RETURN.
IN 2021, THE RECOVERY IN GLOBAL DEMAND, WHICH OUTPACED PREDICTIONS, COMBINED WITH THE SUPPLY CONSTRAINTS, BROUGHT ABOUT PRICE HIKES IN COMMODITY PRICES, IN TURN EXACERBATING
THE RISE IN GLOBAL PRODUCER AND CONSUMER PRICES.
FOLLOWING THE STRONG GROWTH RECORDED IN 2021, THE GROWTH OF THE TURKISH ECONOMY IN 2022 IS EXPECTED TO CONVERGE TOWARDS ITS TREND LEVELS, MAINLY DRIVEN BY FOREIGN DEMAND.
The IMF projects that the global economy, which contracted in 2020, will grow by 5.9% in 2021.
GLOBAL ECONOMY
As global economic activity exceeded projections in 2021, inflationary risks return
With the support of the fiscal and monetary policies implemented to alleviate the impact of the pandemic, the vaccination rollout, relaxation of lockdown measures and the emergence of deferred demand in 2021, the recovery in the global economy exceeded projections.
The uneven access to vaccines led to a divergence in growth between regions and countries with developed countries more advanced in the vaccine development and offering more comprehensive access to the vaccines, and their economies recovered significantly as the vaccination rollout gained pace. On the other hand, the economic recovery was weaker in some developing countries, which had difficulties in procuring vaccines and rolling out the vaccine.
The pace of the vaccination rollout, which started in the first quarter of 2021, gained pace in the second quarter of 2021, stimulating a recovery in the service sector, especially in travel, as the pandemic restrictions were scaled back. With the contribution of the base effect, a strong recovery was observed in the global economy in the first half of 2021.
The recovery in the global economy lost some of its pace in the second half of the year, mainly due to supply chain issues, concerns over the Chinese housing sector, the spread of the Delta variant and the implementation of some restrictive measures. In addition, inflationary pressures increased on the back of high commodity prices and supply and demand imbalances. Against this backdrop, central banks in developed and developing countries brought forward their plans to implement tightening measures.
A strong recovery in the Eurozone 2021
Our biggest foreign trade partner, the Eurozone, posted strong growth in 2021 with the support of the vaccination rollout and supportive monetary and fiscal policies. The ECB has signaled that it will adopt a slower pace of monetary tightening in 2022 when compared to the Fed. Moreover, the region’s PMI data demonstrates that economic growth continues, albeit at a slower pace.
These developments indicate that foreign demand in the Euro Zone may continue to support the growth of the Turkish economy in 2022.
The IMF projects that the global economy, which contracted by 3.1% in 2020, will grow by 5.9% in 2021, with the central banks of many developed countries, especially the Fed, stepping up their pace of monetary tightening in 2022. This would pave the way for a more moderate rate of global growth, of around 4.4%.
One of the main themes of 2021 was the rise in commodity prices.
The Fed fires the starting gun on monetary tightening
In 2021, the recovery in global demand, which outpaced predictions, combined with the supply constraints, brought about price hikes in commodity prices, in turn exacerbating the rise in global producer and consumer prices.
The US economy was one of the economies leading the global recovery in 2021. The vigorous recovery in the labor market focused attention on mounting inflationary pressures. The Fed had initially deemed the high levels of inflation to be a temporary phenomenon before in an about turn predicted that high levels of inflation may remain for a longer period and become more permanent than it had earlier projected, with the fallout of supply bottlenecks now expected to drag on into 2022.
In November 2021, the Fed announced that it would be scaling back its asset purchasing. With the strong course of the US economy and increasing inflationary pressures, the Fed accelerated the reduction in its asset purchase program in its December meeting, while guiding for three rate hikes for 2022.
The Fed is expected to conclude its asset purchase program by March. The minutes of December’s Fed meeting were published in January 2022 where the Fed meeting minutes implied that the FED could even bring forward its planned rate hikes. The Fed started the year with a more hawkish stance while in the meantime, the large-scale stimulus package set out by the Biden administration continues to be debated in congress. The financial steps set out in the package are expected to support the global economy, if the package is approved.
With the verbal guidance and tightening steps by central banks in developed countries, especially in the second half of 2021, developing countries tended to tighten their monetary policies in general. The rate of normalization in the Fed’s monetary policy in 2022 will be one of the key factors determining capital flows into developing countries.
One of the main themes of 2021 was the rise in commodity prices. Many countries released their strategic reserves to the market and the slowdown signals observed in China ensured that commodity prices decelerated to a limited extent in the last period of the year.
The course of Chinese growth, the stance of the OPEC+ Group, Iran’s nuclear deal, the use of strategic reserves and geopolitical risks originating from the war in Ukraine can be listed as important factors which may affect the course of commodity prices in 2022. Potential supportive steps by the Chinese authorities to boost the country’s economy, which is showing signs of slowdown, could help alleviate the tightening in global financial conditions.
In 2022, capital flows into developing countries will be subject to volatility depending on the course of the pandemic, the efficacy of the vaccines in the face of new Covid-19 variants, the possibility of governments tightening their financial policies beyond projections, geopolitical developments in Russia and Ukraine as well as the developments in the Chinese financial and real estate markets stand out as other factors that may bring fluctuations in.
With cases of Covid-19 continuing, along with the emergence of new variants, such as the more infectious Omicron variant in the wake of the Delta variant, uncertainties regarding the pandemic are expected to continue to have an impact on the global economy. However, the lighter symptoms seen in Omicron cases and the process of easing the restrictions seen in the first quarter of 2022 also raise hopes that the pandemic can be brought to an end.
The strong performance in exports also supported employment in the manufacturing sector, which provided nearly a quarter of the new jobs created during the year.
THE TURKISH ECONOMY
Following the strong growth recorded in 2021, the growth of the Turkish economy is expected to converge towards its trend levels, mainly driven by foreign demand.
One of only a few countries to record positive growth in 2020, Turkey’s economy exceeded the forecasts and its potential in 2021 with the support of domestic and foreign demand. The Turkish economy demonstrated an impressive 11% growth in 2021. Consumption accounted for 9.3 percentage points of the 11% growth, with investment providing 1.8 percentage points and net exports 4.9 percentage points of the growth. Inventories negatively affected growth, taking 4.9 percentage points off the total. In terms of production, the manufacturing sector supported the 11% growth with exports accounting for 3.3 points of the total, with the service sector accounting for 4.6 points of the 11% growth on the back of the opening up of the economy and easing of restrictions, which were the driving forces of the growth. The Turkish economy concluded the year 2021 with double-digit growth. The Turkish economy is expected to maintain its positive growth performance in 2022, albeit with some easing in the pace of growth.
The year 2021 was one wrought by difficulties in global trade due to the issues in the global supply chain and a sharp jump in transportation costs. Turkey, on the other hand, turned this situation to its advantage by virtue of its geographical position, achieving record exports in 2021. Exports accounted for nearly half of the growth in 2021 and are set to remain one of the drivers of growth in 2022.
The strong performance in exports also supported employment in the manufacturing sector, which provided nearly a quarter of the new jobs created during the year. Companies which quickly adapted to this environment increased their capacity utilization rates to above historical averages. Consequently, strong demand encouraged companies to ramp up their investments. The upward trend in investment is expected to continue in 2022, supported by brisk foreign demand.
In 2021, tourism receipts exceeded expectations thanks to the vaccination rollout. Together with exports, tourism receipts were instrumental in the narrowing of the current account deficit. The impact of the pandemic is expected to be alleviated in 2022 with the support of vaccines and treatments in 2022, which should sustain positive expectations in the tourism sector. A revival in travel, which had been put on hold during the pandemic, is expected to support the tourism sector in 2022. On the other hand, the developments in Russia and Ukraine - countries which both account for a significant share of foreign visitors coming to our country - will determine the level of tourism revenues to a significant extent.
Past experience demonstrates that the current account deficit tends to expand during periods of high growth. However, despite the strong growth in 2021, the current account deficit narrowed significantly due to a decreasing trend in gold imports, strong exports and recovering services revenues. The 12-month cumulative current account deficit, which had stood at USD 35.5 billion in 2020, decreasing to USD 14.9 billion in 2021, with the current account deficit/GDP ratio therefore decreasing from 5% in 2020 to 1.9% in 2021. In 2022, the course of gold and oil imports will continue to be an important factor. The course of tourism and export revenues are is also expected to have a significant bearing on the current account balance.
2021 was a year marked by inflationary pressures both in the world and in Turkey.
As with the current account balance, significant gains were achieved in the budget balance in 2021. In 2021, when budget revenues exceeded projections, the improvement in the budget balance stood out with a more moderate course in spending. The budget deficit/GDP ratio stood at 2.7% in 2021, significantly below the Medium Term Program target of 3.5%. Both the strong course of domestic demand, high profitability in the manufacturing and trade sectors and the rise in the corporation tax rate all helped government revenues exceed the target. The success achieved in the budget balance during 2021 will offer room for manoeuvre on the financial side in 2022.
2021 was a year marked by inflationary pressures both in the world and in Turkey. The problems experienced in the supply chain as a result of the difficult conditions brought about by the pandemic continued in 2021. Supply constraints in a number of sectors, the rise in commodity prices, drought, exchange rate movements and a surge in demand all drove inflation far beyond projections in 2021.
After remaining high throughout 2022, inflation is expected to decline in the last quarter of 2022 with the support of the base effect.
There was a positive course in employment and unemployment rates in 2021 due to the strength of economic activity, the recovery in tourism and the manufacturing sector supported by strong exports.
The Central Bank of Turkey pursued tight front-loaded monetary tightening in March 2021 before leaving the policy rate on hold until September. The CBRT cut the policy rate by a total of 500 basis points between September and December, by taking into account how monetary policy, movements in core inflation and the effects of supply shocks would affect demand.
There was a positive course in employment and unemployment rates in 2021 due to the strength of economic activity, the recovery in tourism and the manufacturing sector supported by strong exports. The rate of unemployment, which had averaged 13.1% in 2020, declined to an average of 12.1% in 2021. Employment in all sectors exceeded their pre-pandemic period levels. The manufacturing and service sectors led the rise in employment when compared to February 2020, which was the last month before the pandemics struck.
