REFLECTIONS ON THE GLOBAL AND TÜRKİYE LANDSCAPE IN 2023 AND EXPECTATIONS FOR 2024

Initially at 3,5 percent in 2022, growth is anticipated to decelerate to 3 percent in 2023 and to below 3 percent in 2024

The global economy, initially rocked by the pandemic and subsequently by the conflict between Russia and Ukraine, continues to grapple with the aftermath of these significant shocks in 2023. Despite a decline in global inflation, driven by heightened energy costs stemming from geopolitical risks, it remains above the desired levels. Consequently, the need for a tight monetary policy is expected to persist for some time.

The global growth, which was 3.5 percent in 2022, is expected to decrease to 3 percent in 2023. This decline is notably influenced by the subdued growth performance of developed countries, indicating a growth rate below the historical average. In summary, 2023 marked a year characterized by both sluggish growth and high inflation. A noteworthy aspect of 2023 is that, despite interest rate hikes throughout the year, economies successfully navigated a soft landing without experiencing a hard landing. The global economic performance in 2023 varies between developed and developing countries.

Growth in developed countries, initially at 2.6 percent in 2022, is projected to decrease to 1.5 percent in 2023 and further to 1.4 percent in 2024. The primary factor contributing to the pronounced contraction in growth in these countries is the delayed recovery of European nations from the repercussions of the energy shocks stemming from the Russia-Ukraine war.

Conversely, the growth performance in developing countries experienced a more modest decline compared to 2022. Initially at 4.1 percent in 2022, growth is expected to decelerate to 4 percent in both 2023 and 2024. Among emerging economies, China’s performance fell short of expectations, primarily attributed to issues in the real estate market and a decline in investment amid waning confidence. Another crucial issue in 2023 was the battle against inflation. Global inflation has commenced a descent, driven by tight monetary policy measures, particularly from the central banks of advanced economies.

Projected to decrease from 8.7 percent in 2022, global inflation is expected to reach 6.9 percent in 2023 and further decline to 5.8 percent in 2024. Even at present, inflation remains above the 2 percent target for numerous countries. This suggests that the battle against inflation will persist into 2024. Forecasts indicate that by the end of 2025, inflation could be successfully lowered to more desirable levels.

Nevertheless, there is an expectation that developed countries, notably the FED and the ECB, have concluded their series of interest rate hikes and might initiate interest rate cuts as of mid-2024. In tandem with diminishing global growth rates, global trade has experienced a downward trajectory. While global trade sharply declined in the last quarter of 2022, there were expectations for a rebound in 2023 as China reopened its borders. Nevertheless, China’s inability to meet anticipated economic performance continued to adversely affect global trade. After expanding by 5.1 percent in 2022, global merchandise trade is projected to grow by a modest 0.8 percent in 2023 and then rebound to 3.5 percent in 2024.

On the contrary, Türkiye embarked on 2023 with positive momentum according to leading indicators but faced a temporary slowdown in industrial production due to the earthquake disasters in early February. Despite the adverse effects of the deceleration in global growth on foreign trade, the economy expanded by 4 percent and 3.9 percent in the first two quarters of the year, fueled by robust household consumption. From the second half of the year onward, the primary focus of economic policy has been to curb inflation and attain a more balanced growth composition.

In this context, a tight monetary policy relying on interest rate hikes has been implemented, with a priority on policies to boost the confidence of international investors. Additionally, micro policies have been emphasized to prevent the escalating cost of interest from disrupting investment, production, and exports. The growth data for the third quarter of the year was the initial set of results influenced by these policies.

The 5.9 percent growth rate was propelled by consumption, which, though still robust, began to have a diminishing impact. Instead, the growth was fueled by investments, surging by 14.7 percent, and exports, which had been making a negative contribution for three consecutive quarters since the last quarter of 2022, grew by 1.1 percent in this quarter. However, on the supply side, the manufacturing industry, which had been experiencing negative growth since the last quarter of 2022, expanded by 6.2 percent in this quarter.

The growth in the first three quarters amounted to 4.7 percent following the 5.9 percent expansion. In the Medium-Term Program, the growth estimate for 2023 stands at 4.4 percent, and in this context, the annual growth target is deemed easily attainable. Nevertheless, it will be imperative to prioritize a structure in which household consumption diminishes, and there is a shift towards investment and exports in the composition of growth. Our exports in 2023 increase by 0.6 percent compared to 2022 and recahed to 255.8 billion USD.

Low growth rates and a decrease in global trade, particularly in Europe, our primary export partner, persisted in harming our export performance in 2023. On the inflation front, the measures implemented since the second half of 2023 have bolstered market confidence, initiating a process in which expectations are better managed. In this context, inflation declined to 64.8 percent, slightly below both the market expectation and the official estimate of 65 percent. In 2024, it is projected that consumption expenditures will decrease, and the growth performance will be oriented towards investment and exports.

In this context, the growth expectation of 4.4 percent in 2023 is expected to decrease to 4 percent in 2024, considering the overall decline in global economic growth. In 2023, global trade in goods witnessed a 0.8 percent increase, and it is expected to further rise to 3.5 percent in 2024. This presents an opportunity for our export-led growth model.

In 2024, with an expected growth rate of 4 percent, our exports are projected to increase by 4.7 percent, reaching 265 billion USD. From the second half of 2023, the tangible impact of the stringent monetary policy based on interest rate hikes is anticipated to become more pronounced, extending into the second half of 2024. As a result, inflation, which stood at 65 percent at the end of 2023, is anticipated to drop below 40 percent by the end of 2024.

In 2024, the perspective of credit rating agencies toward Türkiye and, consequently, the preference of international investors for Turkish assets will play a crucial role in achieving 4 percent growth and reducing inflation. Initial statements by credit rating agencies in this context have been positive, with S&P and Moody’s recently revising Türkiye’s rating outlook from stable to positive. In 2024, this process is anticipated to be supported by rating upgrades, and capital flows to Türkiye are expected to increase. Finally, I would like to conclude by addressing the impact of the earthquake on public finances.

The earthquakes we experienced in February will contribute to an impact on public finances by augmenting the budget deficit. Nonetheless, this impact is projected to be temporary, encompassing only the years 2023 and 2024, and is not expected to adversely affect Türkiye’s risk premium. In this context, the general government budget deficit is expected to be 5.4 percent in 2023 and 6 percent in 2024, eventually narrowing to meet the Maastricht criterion of 3 percent in 2025. The EU-defined general government debt stock is forecasted to increase to 33.3 percent in 2023 and 35.2 percent in 2024, before commencing a downward trend.