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    The baseline scenario for 2014 (2)

    Fatih Özatay, PhD03 December 2013 - Okunma Sayısı: 775

    Even the FED does not initiate tapering on 17-18 December, the statements after the meeting might alter expectations on the timing and the magnitude of tapering.

    It’s time for an “early” baseline scenario. ‘Early’ because the scenario mainly depends on the steps the Federal Reserve (FED) will take and the FED will hold a meeting on December 17-18. It is a possibility that the FED will take the “feared” tapering decisions during its December meeting. Even if it delays the decision, the statements after the meeting might alter expectations on the timing and the magnitude of tapering. In that case I will have to update the current one with a “new baseline scenario.” Below are my assumptions for external conditions under the current circumstances:

    The FED will taper and halt the third quantitative easing throughout the year. Tapering will start latest in March 2014 if not in December. In line with previous statements, the federal bond rate will be kept constant throughout 2014.

    Uncertainties concerning the US fiscal policy will not be higher than what it was in 2013. In other words, the worrisome conflict between the Republican Party and the Democrat Party will remain intact. But each time they will reach deal in no time. By the way, let me note that the first test on this assumption will take place in the early 2014.

    The Europe will not be pushed into deflation and a snail-like recovery will take place: The IMF estimates zero growth for the European Union in 2013 and 1.3 percent growth in 2014. The estimate for the Eurozone is 1 percent. The crisis countries will maintain the current economic programs. In short, the concerns about the collapse of Euro will be off the table.

    Under these circumstances, the ECB will not carry out quantitative easing via bond purchases. The policy rate currently at 0.25 percent might be cut down to zero. The growth prospects for the Union are critical not only as it will determine the roadmap of the ECB but also for Turkey’s export performance. Europe is still the largest export market of Turkey; which received 40 percent of Turkey’s exports in the first nine months of the year.

    The share of the Middle East and North Africa, the second largest export market of Turkey was 30 percent in the same period. My third assumption is that the MENA region will grow at a rate estimated by the IMF: 2.1 percent in 2013 and a significantly stronger 3.8 percent in 2014.

    The price of crude oil will be lower than 2013 average (the IMF expects a drop by 3 percent).

    Turkey’s foreign policy will not be more problematic than in 2013. Despite the recent efforts of “tuning”, I believe that the problems with the US will not ease down considerably.

    Public spending increased remarkably in 2013. The GDP growth in the last quarter of 2012 and the first quarter of 2013 relied exclusively on this increase in public spending. And half of the GDP growth came from the public sector in the second quarter. I assume that the contribution of the public sector to GDP growth will not be as strong in 2014, though it will be maintained to some degree.

    The most critical ones of these assumptions are the first two. Soon I will address how these will shape macroeconomic developments if realized.

     

    This commentary was published in Radikal daily on 03.12.2013

    Even the FED does not initiate tapering on 17-18 December, the statements after the meeting might alter expectations on the timing and the magnitude of tapering.

    It’s time for an “early” baseline scenario. ‘Early’ because the scenario mainly depends on the steps the Federal Reserve (FED) will take and the FED will hold a meeting on December 17-18. It is a possibility that the FED will take the “feared” tapering decisions during its December meeting. Even if it delays the decision, the statements after the meeting might alter expectations on the timing and the magnitude of tapering. In that case I will have to update the current one with a “new baseline scenario.” Below are my assumptions for external conditions under the current circumstances:

    The FED will taper and halt the third quantitative easing throughout the year. Tapering will start latest in March 2014 if not in December. In line with previous statements, the federal bond rate will be kept constant throughout 2014.

    Uncertainties concerning the US fiscal policy will not be higher than what it was in 2013. In other words, the worrisome conflict between the Republican Party and the Democrat Party will remain intact. But each time they will reach deal in no time. By the way, let me note that the first test on this assumption will take place in the early 2014.

    The Europe will not be pushed into deflation and a snail-like recovery will take place: The IMF estimates zero growth for the European Union in 2013 and 1.3 percent growth in 2014. The estimate for the Eurozone is 1 percent. The crisis countries will maintain the current economic programs. In short, the concerns about the collapse of Euro will be off the table.

    Under these circumstances, the ECB will not carry out quantitative easing via bond purchases. The policy rate currently at 0.25 percent might be cut down to zero. The growth prospects for the Union are critical not only as it will determine the roadmap of the ECB but also for Turkey’s export performance. Europe is still the largest export market of Turkey; which received 40 percent of Turkey’s exports in the first nine months of the year.

    The share of the Middle East and North Africa, the second largest export market of Turkey was 30 percent in the same period. My third assumption is that the MENA region will grow at a rate estimated by the IMF: 2.1 percent in 2013 and a significantly stronger 3.8 percent in 2014.

    The price of crude oil will be lower than 2013 average (the IMF expects a drop by 3 percent).

    Turkey’s foreign policy will not be more problematic than in 2013. Despite the recent efforts of “tuning”, I believe that the problems with the US will not ease down considerably.

    Public spending increased remarkably in 2013. The GDP growth in the last quarter of 2012 and the first quarter of 2013 relied exclusively on this increase in public spending. And half of the GDP growth came from the public sector in the second quarter. I assume that the contribution of the public sector to GDP growth will not be as strong in 2014, though it will be maintained to some degree.

    The most critical ones of these assumptions are the first two. Soon I will address how these will shape macroeconomic developments if realized.


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