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The baseline scenario for 2014 (1)
Taking into account the current vulnerabilities facing the Turkish economy, two external determinants come to the fore: the US and Europe.
It is almost the end of the year. The most popular item in the coming weeks’ agenda will be how Turkey will perform in 2014 under “normal conditions.” Please don’t get me wrong when I say “normal conditions.” Although the world economy is and will be performing under abnormal conditions, the abnormal has to be considered the normal when doing prospective analysis. Perhaps I should stick to the usual “baseline scenario” expression to avoid confusion.
So, what is the possible baseline scenario for 2014? Although difficult, it has to be answered. Taking into account the current vulnerabilities facing the Turkish economy, two external determinants come to the fore: the US and Europe. There of course are other external factors that can influence Turkey’s economic performance, including the Syrian crisis, recent developments in Iran, oil prices, growth prospects of the MENA region, the second largest export market of Turkey. We may add up the upcoming elections in Turkey as well. But none of these will be as influential as the prospects for the US and Europe.
In the light of our experiences during 2013, we can identify two major factors concerning the US. The first is the Federal Reserve (FED), obviously. When, if not immediately right after the meeting on 17-18 December, and at what magnitude the FED will initiate tapering is the main determinant here. Net capital inflows to Turkey have decreased radically since May, when the FED first brought the tapering plan forward. Average net inflows were down from $10.7 billion in the first four months to $2.1 billion in the following five months. As a result, exchange and interest rates hiked. After a certain point, drops in net capital inflows push down credit growth rate, which affects investment and consumption and hence GDP growth negatively. The FED’s policy decisions will therefore be important also in 2014.
The second US-based factor is whether or not the well-known strife that might jam the US fiscal policy will continue in 2014. The first test is due in the first months of the year. We will see what is going to happen. If it results in a Congress shut down once again, the FED might postpone or ease the magnitude of tapering (if it does not initiate it in December, of course). Constructing the scenario is challenging even when you only consider the US. And there are uncertainties concerning Europe on top of that.
A couple of good things happened in Europe this year. First, European leaders have taken some small steps for the establishment of a joint banking authority. Second, unit labor costs have decreased in all crisis countries except Italy. None is as good as Germany yet, but one of the chief problems of the Eurozone seems to be healing. On the other hand, GDP growth across Europe is still slow and inflation is too low.
It is discussed whether or not the European Central Bank (ECB) will loosen its monetary policy further. The ECB’s decision depends on two factors. First is about inflation, which decreased below 1 percent in the last two months raising concerns about a possible case of deflation. Second one is about global growth. If growth does not rebound and inflation rate remains below 1 percent, the ECB might introduce additional precautions. It has three alternative tools which are non-exclusive: to cut interest rate to zero from the current 0.25 percent; to offer negative interest to banks’ reserve money at the ECB; and to withdraw more liquidity from the market via bond purchases. The first option is the most likely while there are doubts about the second one.
The third one will probably have allergenic effects on Germany. To be continued.
This commentary was published in Radikal daily on 26.11.2013