2021 Macroeconomic Imbalance Indicators: European Union and Turkey The 8th issue of TEPAV Macroeconomic Imbalance Indicators Bulletin has been published.

When the developments in the EU economy are examined in the light of the MIP indicators, it is observed that the contraction in the GDP in the member countries has been compensated to a large extent in the post-pandemic period and the growth has been strengthened. On the other hand, the high savings of households and the postponement of consumption during the pandemic caused a rapid increase in domestic demand with the removal of restrictions, and inflation accelerated throughout the EU, accompanied by supply bottlenecks and high energy prices. In 2021, it is seen that the current account balance of most member countries returned to their pre-COVID-19 crisis position, and their external stock positions contracted with higher GDP growth. Similarly, the ratios of public sector and non-financial corporate debt stock to GDP declined in 2021, but were generally outside the threshold or above 2019 levels. In the labor market, it was observed that government supports stabilized employment and household disposable income increased in real terms in most EU countries. In 2022, after Russia's invasion of Ukraine, the positive economic outlook deteriorated significantly as the supply of Russian gas to Europe was interrupted. While the rapidly rising energy prices became the main determinant of inflation across the EU, current accounts were adversely affected. Comprehensive support measures provided to households and companies for high energy prices increased the indebtedness of the public sector.

In Turkey, unlike EU countries, real effective exchange rates and unit labor costs are at historically low levels, and despite the strong competitive position, the improvement observed in the current account balance in 2021 could not be sustained and as of September 2022, the highest current account deficit value of the last 4 years was reached. The deceleration of exports and historically low terms of trade indicate that the current account deficit will increase further. On the other hand, despite the strong growth in GDP in 2021, general government indebtedness increased. While there was no change in the indebtedness of the private sector due to the slowdown in credit use, the acceleration of inflation and negative real interest rates in 2022 enhanced the private sector's use of new credits. Although these indicators are below the thresholds defined for the EU, Turkey differs significantly from the EU countries with the levels of real house prices and financial sector liabilities far above the threshold values. Shrinking labor force participation and high unemployment rates also indicate a negative differentiation in the labor market.

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