Ankara, April 28, 2016 — Growth in Turkey increased to 4 percent in 2015, reflecting stronger private and public consumption, but is expected to slow down to 3.5 percent in 2016 because of a more negative contribution from net exports compared to 2015, according to the April edition of the World Bank’s Turkey Regular Economic Brief[i], issued today in Ankara.
In 2015, private consumption rose, thanks to strong real wage growth and an income effect due to lower oil prices. Moreover, as many households hold foreign currency deposits, the depreciation of the lira created a wealth effect, which also supported consumption. Public spending remained expansionary and also contributed significantly to growth in 2015. Private investment remained weak in 2015 and was volatile throughout the year. Exports marginally declined in 2015, against the backdrop of the economic crisis in Russia, lower demand from the EU, and continued weaknesses in the Middle East and Northern Africa (MENA). Imports sequentially dropped in the first three quarters of 2015, before recovering substantially in Q4 to bring import growth into positive territory.
The World Bank Brief notes that stronger growth led to a rise in employment creation, but also that the unemployment rate was little changed. The non-agricultural labor force increased by 413,000 in Q4. At the same time, non-agricultural job creation increased to 386,000 in Q4, from 41,000 in Q3, thanks to a broad-based recovery across all sectors, particularly in industry. As a result, the non-agricultural unemployment rate stabilized at 12.4 percent. Data for early Q1 of 2016 suggests a modest slowdown in job creation, but an improvement in unemployment due to a slower increase in labor force.
Lower energy prices helped reduce the current account deficit. A decline in the energy deficit more than offset the rise in the core current account deficit (excluding gold and energy) since the middle of 2015, reversing the earlier trend. However, exports have struggled and the core current account deficit has remained unchanged, suggesting that the external adjustment has been driven mainly by cyclical factors instead of structural reforms.
The Brief also indicates that inflation (excluding volatile food and fuel prices) remains high, but the outlook for the next few months is more promising due to the stable lira. On the back of lower food inflation, 12-month headline inflation eased by 2.1 percentage points (ppts) from its recent peak in January to 7.5 percent by March. However, 12-month core inflation declined only marginally by 0.1 ppts to 9.5 percent in this period. A stable currency will bring to nil the pass-through from exchange weakness to inflation and has helped improve the inflation outlook.
The central bank loosened its monetary policy in March and April. Turkish financial markets have rebounded since late February, as a rally in oil prices as well as recent dovish rhetoric from the US Federal Reserve supported asset prices in emerging markets. As a result of stronger portfolio inflows and lower FX selling auctions, the central bank's gross reserves reached $116.6 billion by early April, from $110.5 billion in February 2016. Against the backdrop of a favorable global environment, the central bank cut the overnight lending rate cumulatively by 75 bps to 10 percent, while keeping the 1-week repo rate and overnight borrowing rate unchanged in its March and April meetings.
The general government budget deficit is expected to widen to 1.8 percent in 2016, from a balanced budget in 2015. Early in the year, spending pressures are building up following the implementation of election pledges, while tax revenues slow. The government’s revised Medium Term Program assumes a notable rise in expenditures due to election promises, but with a limited increase in the deficit (to 0.7 percent of GDP). The target reflects a stronger revenue performance than our estimate, because of the government’s 4.5 percent GDP growth assumption. By contrast, we forecast a larger deficit in 2016, as we anticipate a weaker revenue performance given our slower GDP growth projection.
External demand is projected to continue to be weak in 2016. Turkey`s real exports to the EU lost momentum early this year and are likely to grow modestly in the remainder of the year. Geopolitical problems in MENA continue, and Turkey`s exports to this region will continue to be weak. With a likely contraction in Russia`s output and no resolution of the tensions, exports to Russia will continue to fall in 2016. In addition, the downward trend in tourism revenues is expected to continue in 2016, because of an expected sharp drop in visitors from Russia and lower arrivals from Europe.
The Brief also notes that private investment has remained depressed for the last four years. Weak private investment is now a structural rather than a cyclical problem. Leverage in the corporate sector has risen rapidly in the aftermath of the global crisis; thus, the room for debt financed growth has narrowed. Moreover, lira depreciation has strained balance sheets and raised the debt service burdens of the corporate sector, which has sizable foreign exchange exposure. These have weighed heavily on private investment by deteriorating investor confidence, along with a widespread perception of deteriorating institutional quality and business climate[ii].
Imports recovered sequentially in Q4 of 2015, earlier than expected, and are likely to maintain this momentum throughout 2016. The external challenges will constrain export growth at a very low rate in 2016. The minimum wage increase will boost private consumption and keep it as the main driver of growth in 2016. Public spending is expected to contribute to growth, albeit at a decelerating pace. Private investment is expected to remain relatively weak in 2016, on the back of the above-mentioned structural problems. The recent increase in terrorist activity as well as the unrest in the Southeast are the downside risks to our growth forecast. Continued lower oil prices will help bring the current account deficit to around 4.1 percent of GDP in 2016. The FX pass-through is phasing out, thanks to the stabilization of the lira, but demand pressures are likely to arise towards the second half of the year, because of strong consumption, and make disinflation a slow process. Inflation is projected to be at 8.5 percent by end-2016.
The World Bank’s work in Turkey is based on a joint Country Partnership Strategy (CPS) for the period 2012-2016. The CPS aims to support Turkey’s transition to high income with financing of up to US$ 6.45 billion during the five year period, as well as with policy analysis and advisory services. Key objectives include enhanced competitiveness and employment, improved equity and public services and deepened sustainable development. The World Bank’s partnership with Turkey is evolving to include the sharing of knowledge and experience with a wider international audience.
[i] Turkey Regular Economic Brief is a two page brief assessing current developments in the Turkish macro economy and provides World Bank quarterly forecasts on key macroeconomic variables, linking these to underlying trends in structural reforms.
[ii] As indicated by World Economic Forum Global Competitiveness Indicators - Institutions sub index, Open Budget Index, Fraser Institute - Light Regulation sub index, World Bank Doing Business - Ease of Doing Business sub index, and Heritage Foundation - Index of Economic Freedom.