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Central Bank of the Republic of Turkey 4. Supply and Demand Developments The GDP data of the last quarter of 2013 suggest that economic activity remained largely consistent with the outlook presented in the January Inflation Report. Seasonally adjusted data point to an increase of 0.5 percent in the GDP on a quarterly basis. Thus, economic activity, which gained momentum in the first half of the year, continued with a rather moderate course in the second half. Having settled on a weak path in the preceding two quarters, final domestic demand recorded a faster increase in the last quarter. As for the components of the final domestic demand, the private sector demand continued with a mild course across 2013, while the public sector demand, which registered a fluctuating course, proved to be the main driver of growth in the domestic demand. Imports lagged behind exports on a quarterly basis in the last quarter and demand components, as projected, displayed a balanced outlook compared to the first half of the year. Data pertaining to the first quarter of 2014 point to a mild increase in economic activity. On the production side, the industrial production index stood above the previous quarter’s average and maintained a stable uptrend on a quarterly basis in the January-February period. On the expenditures side, the private sector demand slowed due to the consumption of durable goods and private machinery and equipment investments. On the other hand, the data on the consumption of nondurable goods and construction investments are still favorable. As for the second quarter, indicators of BTS as well as credits and imports indicate that domestic demand will remain sluggish. Accordingly, domestic demand is envisaged to follow a weak course in the first half of the year. External demand indicators point to an uptick in the exports of goods and services, and a decrease in the imports thereof. A similar situation applies to export and import indicators excluding gold that reflects the underlying trend. Thus, it is projected that the balancing among demand components will continue in the first quarter and the current account deficit will record a slight decline on a quarterly basis. In the first half of the year, domestic demand is envisioned to follow a sluggish course due to domestic uncertainties and tightening in financial conditions, while net exports and the public sector demand are expected to compensate for this course. In line with waning uncertainties, the private sector demand is estimated to improve in the second half. Meanwhile, it should be noted that the tightening in financial conditions owing to recent developments may impose downside risks on domestic demand. Accordingly, domestic demand conditions are expected to support the disinflation process and contribute to the recent improvement in the current account deficit. 4.1. Gross Domestic Product Developments and Domestic Demand According to the national accounts data released by the TurkStat, the GDP posted a year-onyear increase by 4.4 percent in the last quarter of 2013. The final-quarter data led to a retrospective revision of the national accounts data by subcategories (Box 4.1). Thus, following the growth of 2.1 percent in 2012, the GDP rose by 4.0 percent in 2013. Seasonally adjusted data suggest that the economic activity continued to grow at a slower pace, while the growth of final domestic demand gained slight momentum in the last quarter (Chart 4.1.1). This acceleration was attributed to the rising Inflation Report 2014-II 31 Central Bank of the Republic of Turkey public sector demand that followed a fluctuating course in 2013, while the private sector demand remained mild (Chart 4.1.2). Chart 4.1.2. GDP and Final Domestic Demand Public and Private Sector Demand (Seasonally Adjusted, Billion TL, 1998 Prices) (Seasonally Adjusted, 2011Q1=100) GDP Final Domestic Demand 32 32 30 30 28 26 Millions Chart 4.1.1. Private Sector Demand Public Sector Demand 130 130 120 120 28 110 110 26 100 100 24 24 90 90 22 22 80 80 20 20 70 70 18 18 60 12341234123412341234123412341234123412341234 60 123412341234123412341234123412341234 20032004 20052006 20072008 20092010 20112012 2013 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: TurkStat, CBRT. The first-quarter data indicate that private demand decelerated. In the January-February period, the production of consumption goods increased, while that of imports declined (Chart 4.1.3). The effects of tight financial conditions, depreciated Turkish lira, weakened consumer confidence and tax adjustments were mostly observed in the demand for automobiles and durable consumption goods. In fact, the analysis of consumption good imports by subcategories points to a steep fall in imports of automobiles, and a mild fall in those of durable and semi-durable goods; while imports of non-durable goods remained on the increase (Chart 4.1.4). The production of consumption goods followed a similar course in the January-February period such that the production of durable consumption goods receded on a quarterly basis in contrast to the continued increase in the production of non-durable goods. As for machinery and equipment investments, the production of investment goods excluding transport vehicles remained almost flat, while the imports thereof recorded a decline (Chart 4.1.5). On the construction front, data on investments indicate further increase in construction investments (Chart 4.1.6). In sum, demand for durable consumption goods and machinery and equipment investments decreased, while the uptrend in non-durable consumption goods and construction investments continued. Chart 4.1.3. Chart 4.1.4. Production and Import Quantity Indices of Consumption Goods Import Quantity Indices of Consumption Goods by Subcategories (Seasonally Adjusted, 2010=100) (Seasonally Adjusted, 2010=100) Production Imports (right axis) 120 125 115 115 110 105 150 Passenger Cars Semi-Durable Goods Durable Goods Non-Durable Goods 150 130 130 110 105 95 110 100 85 90 90 95 75 90 65 70 70 85 55 50 50 80 45 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 41* 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 30 30 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 41* 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 *As of February. Source: TurkStat, CBRT. 32 Inflation Report 2014-II Central Bank of the Republic of Turkey Chart 4.1.5. Chart 4.1.6. Production and Import Quantity Indices of Capital Goods Excluding Transport Vehicles Production and Import Quantity Indices of NonMetallic Mineral Goods (Seasonally Adjusted, 2010=100) (Seasonally Adjusted, 2010=100) Production Imports Production Imports (right axis) 150 140 125 135 140 130 120 125 130 120 115 115 110 105 105 95 100 85 95 75 120 110 110 100 100 90 90 80 80 90 65 70 70 85 55 60 60 80 45 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 41* 1234123412341234123412341234123412341* 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 *As of February. Source: TurkStat, CBRT. BTS indicators suggest a sustained weak course in domestic demand in the second quarter. In fact, expectations of domestic market orders for the manufacturing of consumption and investment goods waned in the first quarter (Charts 4.1.7 and 4.1.8). On the other hand, the registered domestic market orders for the manufacturing of consumption goods as well as the recent recovery in the consumer confidence index suggest a possible mild rebound in the consumption demand in the upcoming period. Meanwhile, expectations of investment and employment, which reflect the relatively longer-term decisions of firms, exhibit a weak outlook (Chart 4.1.9). Accordingly, the sluggish course of investments is expected to persist for a while. However, private machinery and equipment investments, which is still 8.3 percent below the first-quarter reading in 2011, is not estimated to contract noticeably across the year, given the consumption demand outlook besides the favorable performance of exports. In sum, the lower uncertainty perception, the improved consumer confidence, the slightly appreciated Turkish lira and the recovered consumption demand are estimated to support the domestic demand for a gradual rebound starting from the second quarter (Chart 4.1.10). On the other hand, it should be noted that downside risks on domestic demand are present due to tightened financial conditions caused by recent developments. Chart 4.1.7. Chart 4.1.8. Registered Domestic Orders and Expectation of New Domestic Orders in the Manufacturing Sector of Consumption Goods* Registered Domestic Orders and Expectation of New Domestic Orders in the Manufacturing Sector of Investment Goods* (Seasonally Adjusted) (Seasonally Adjusted) Registered Domestic Orders Expectation of New Domestic Orders (right axis) Registered Domestic Orders Expectation of New Domestic Orders (right axis) 0 -5 -10 -15 -20 -25 -30 -35 -40 -45 -50 30 0 40 25 -10 30 20 -20 20 15 -30 10 10 -40 0 5 -50 -10 -60 -20 -70 -30 -80 -40 0 -5 -10 -15 12341234123412341234123412341 2007 2008 2009 2010 2011 2012 20132014 -90 -50 12341234123412341234123412341 2007 2008 2009 2010 2011 2012 20132014 * Question 19 in BTS for registered domestic orders (below normal-above normal) and question 21 in BTS for expectation of 3-month-ahead domestic orders (increase-decrease). Source: CBRT. Inflation Report 2014-II 33 Central Bank of the Republic of Turkey Chart 4.1.9. Chart 4.1.10. BTS Expectation for Investment and Employment* Consumer Confidence* (Seasonally Adjusted) Expectation of Investment Expectation of Employment 30 30 10 10 CNBC-e TurkStat-CBRT (right axis) 124 85 114 80 104 75 * Question 23 in BTS asks the survey respondents the expectation of fixed investment to increase or decrease in the upcoming 12-month relative to past 12-month. Question 7 in BTS asks the survey respondents the expectation of total employment to increase or decrease in the upcoming 3-month. Source: CBRT. 0414 0414 1013 0413 1012 0412 1011 0411 1010 0410 1009 0409 1008 0408 1007 0407 -70 1013 50 -70 0413 55 54 -50 1012 60 64 -50 0412 65 74 1011 84 0411 -30 1010 70 -30 0410 94 1009 -10 0409 -10 *Preliminary CNBC-e data for April. Source: CNBC-e, TurkStat, CBRT. To sum up, economic activity registered a mild increase in the second half of 2013 following the robust course in the first half. The public sector followed a fluctuating course throughout the year, while the private sector demand remained moderate. Due to domestic developments and the movements in the exchange rates and interest rates in the first quarter, the private sector demand is expected to grow at a decelerating pace in the first half of 2014. On the other hand, parallel to the waning domestic uncertainties, the private sector demand is estimated to recover, while tight financial conditions will limit this rise. Under these circumstances, domestic demand developments are expected to partially restrain the recent cost-side pressures. Moreover, the anticipated slowdown in domestic demand is believed to support the recent improvement in the current account deficit and the balancing process. 4.2. External Demand National accounts data of the last quarter of 2013 indicated that exports of goods and services fell by 1.5 percent, while imports thereof rose by 9.3 percent in annualized terms. Thus, the negative contribution of net exports to annual growth continued into the last quarter (Chart 4.2.1). In seasonally adjusted terms, exports recorded a more pronounced increase than imports on a quarterly basis, affecting the balancing among external demand components positively (Chart 4.2.2). Chart 4.2.1. Chart 4.2.2. Contribution of Net Exports to Annual GDP Growth Exports and Imports of Goods and Services (Seasonally Adjusted, 1998 Prices, Billion TL) (Percentage Point) Exports Exports Net Exports 8 6 4 2 0 -2 -4 -6 -8 -10 1 2011 2012 2 3 2011 4 1 2 3 2012 4 1 2 3 2013 4 1* 2014 Imports 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 Millions Imports 8 6 4 2 0 -2 -4 -6 -8 -10 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 41* 2006 2007 2008 2009 2010 2011 2012 20132014 * Estimate. Source: TurkStat, CBRT. 34 Inflation Report 2014-II Central Bank of the Republic of Turkey Data regarding the first quarter of 2014 reveal that the export quantity index trended upwards in the January-February period. The core index excluding gold exports continued with its steady trend and posted a quarter-on-quarter increase in this period (Chart 4.2.3). Recent indicators on PMI point to a sustained recovery on a global scale. As for medium-term indicators, the export-weighted global growth continues to improve (Chart 2.1.1). In addition, exports are expected to contribute positively to growth in the upcoming period amid the depreciation of the Turkish lira. Chart 4.2.3. Chart 4.2.4. Export Quantity Indices Import Quantity Indices (Seasonally Adjusted, 2010=100) (Seasonally Adjusted, 2010=100) Exports Exports (excl. gold) 140 Imports 140 120 120 100 Imports (excl. gold) 135 135 125 125 115 115 105 105 95 95 85 85 75 75 100 80 80 60 60 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 41* 2006 2007 2008 2009 2010 2011 2012 20132014 65 65 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 41* 2006 2007 2008 2009 2010 2011 2012 2013 2014 * Estimate for March. Source: TurkStat, CBRT. The import quantity index slumped in the January-February period; however, excluding gold, the index posted a modest fall quarter-on-quarter. Due to the recent tightening in financial conditions coupled with the measures taken, the growth rate of consumer loans lost pace. Accordingly, the current data on the domestic sales of white goods and automobiles indicated a dramatic decline. Analysis of these developments in quarterly terms leads to the anticipation that the deceleration in domestic demand will pull both total imports and imports excluding gold down in the first quarter (Chart 4.2.4). Accordingly, imports of goods and services are expected to fall in this period (Chart 4.2.2). In the first quarter of 2014, final domestic demand is expected to lose momentum, while exports are estimated to restrain the effects of this deceleration on growth. It is projected that the re-balancing will continue further and net exports will contribute positively to growth in this period (Chart 4.2.1). The improvement in the seasonally adjusted current account balance is expected to accelerate and the current account balance excluding energy and gold is envisaged to post surplus again in the first quarter (Chart 4.2.5). On the other hand, the recovery in the 12-month cumulative current account balance in nominal terms is anticipated to be slower and rather limited (Chart 4.2.6). Inflation Report 2014-II 35 Central Bank of the Republic of Turkey Chart 4.2.5. Chart 4.2.6. Current Account Balance* Current Account Balance* (Seasonally Adjusted, Billion USD) (12-Month Cumulative, Billion USD) Current Account Balance Current Account Balance (excl. gold) Current Account Balance (excl. energy and gold) 12 12 30 Current Account Balance Current Account Balance (excl. energy and gold) Current Account Balance (excl. gold) 30 6 6 10 10 1213 0813 0413 -90 2005 2006 2007 2008 2009 2010 2011 2012 20132014 1212 -90 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 41* 0812 -70 0412 -70 -24 1211 -18 -24 0811 -18 0411 -50 1210 -50 0810 -30 -12 0410 -30 -12 1209 -10 0809 -10 -6 0409 0 1208 0 -6 * Estimate for March. Source: TurkStat, CBRT. 4.3. Labor Market Unemployment rates have recorded an increase as of the first quarter of 2013 amid the sluggish course of non-farm employment. The third quarter was marked by the deepest slowdown in employment such that the non-farm employment decreased, while unemployment rates surged (Charts 4.3.1 and 4.3.2). In the January period covering the observations regarding the last quarter of 2013 and the first quarter of 2014, unemployment rates plummeted compared to the third quarter of 2013. The decline in unemployment rates was mainly driven by the rise in the non-farm employment (Chart 4.3.2). Chart 4.3.1. Chart 4.3.2. Unemployment Rates Contributions to Non-Farm Unemployment (Seasonally Adjusted, Percent) (Seasonally Adjusted, Percent) Employment Loss Population Rise Participation Rate Non-Farm Unemployment Rate Labor Force Participation Rate (right axis) Unemployment Rate 20 Non-Farm Unemployment Rate 18 52 3 51 2 2 1 1 50 16 49 14 3 0 0 -1 -1 -2 48 12 47 10 46 -2 8 45 -3 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 41* 2006 2007 2008 2009 2010 2011 2012 20132014 -3 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1* 2010 2011 2012 2013 2014 * 2-month difference as of January. Source: TurkStat, CBRT. In the first quarter of 2013, non-farm employment increased owing to the contributions of the industrial and business services sectors. In the succeeding period, the slowdown in these sectors and the employment losses in the construction sector caused the employment outlook to deteriorate (Charts 4.3.3 and 4.3.5). Both in the last quarter of 2013 and in January 2014, non-farm employment recorded an increase thanks to the construction and services sectors. Employment in the construction sector increased far above the readings in early 2013, mostly amid the rise in unregistered employment. Having trended downwards in the first half of 2013, unregistered employment followed a flat course in 36 Inflation Report 2014-II Central Bank of the Republic of Turkey the subsequent periods also owing to the rise in unregistered construction employment. Registered employment, which slowed down gradually in the first three quarters of 2013, displayed an upsurge in the following two quarters (Chart 4.3.4). Chart 4.3.3. Chart 4.3.4. Employment in Services and Construction Sectors Non-Farm Employment (Seasonally Adjusted, Million People) (Seasonally Adjusted, Million People) 2.0 13.2 1.8 12.7 1.6 12.2 11.7 11.2 10.7 0.6 10.2 0.4 9.7 0.2 9.2 7 13 6 12 5 11 0114 0713 0113 0712 0106 0706 0107 0707 0108 0708 0109 0709 0110 0710 0111 0711 0112 0712 0113 0713 0114 0112 4 0709 10 0711 0.8 8 14 0111 1.0 15 0710 1.2 9 0110 1.4 Informal (right axis) 16 Thousands Formal Services (right axis) Thousands Construction Source: TurkStat HLFS, CBRT. Even though industrial production continued to grow steadily since the second quarter of 2013, the industrial employment displayed a limited rise (Chart 4.3.5). Leading indicators point to a mild increase in industrial employment in the first quarter of 2014. The BTS indicator on expectation of employment, which reflects the views of private firms operating in the manufacturing industry sector, settled on a flat course in the first quarter (Chart 4.3.6). Similarly, having declined slightly in the last two quarters, the PMI indicator, which is a benchmark for the manufacturing industry employment, followed a flat course (Chart 4.3.6). In addition, production developments in the manufacturing of non-metallic mineral goods, providing the construction sector with intermediate goods, signal a recovery in construction activities in the first quarter of 2014 as well (Chart 4.1.6). Increases in construction employment in the last two quarters are consistent with this indicator. The CBRT’s consumer confidence index, which reflects households’ sentiments across Turkey, receded in the first quarter of 2014. Given that the unemployment rate follows the confidence index with a lag, this outlook points to a possible break in the deceleration of unemployment rate in the upcoming period. Chart 4.3.5. Chart 4.3.6. Industrial Employment and Production Employment Expectations and PMI Employment Index (Seasonally Adjusted, 2005=100) (Seasonally Adjusted) Industrial Employment Industrial Production (formal) Industrial Production (3-month moving average) Source: TurkStat HLFS, CBRT. Inflation Report 2014-II 0314 0913 0313 25 0912 30 50 0312 80 0205 0805 0206 0806 0207 0807 0208 0808 0209 0809 0210 0810 0211 0811 0212 0812 0213 0813 0214 80 35 60 0911 90 40 70 0311 90 45 80 0910 100 0310 100 50 90 0909 110 55 100 0309 110 60 110 0908 120 65 120 0308 120 PMI (right axis) 130 0907 130 0307 130 Manufacturing Industry Employment (HLFS) Source: Markit, BTS. 37 Central Bank of the Republic of Turkey Analysis of labor market developments with regard to domestic demand suggests that, parallel to the rise in real wage payments in the last quarter of 2013, the robust course of employment points to an increased support given by total wage payments to domestic consumption spending (Chart 4.3.7). In the first half of 2013, the rise in hourly wages and the sluggish course of average productivity caused real unit wages to maintain the upward trend. Due to the deceleration of the rise in turnover and hourly wages, this trend paused in the third quarter (Chart 4.3.8). In view of the inflation projections, the minimum wage amount to apply for 2014 does not imply a decline in real wages. Chart 4.3.7. Chart 4.3.8. Household Domestic Consumption and Real Wage Payments* (Annual Percent Change) Real Unit Wages* (Annual Percent Change) Industrial Manufacturing Real Wage Payments Consumption Spending (excl. furniture, household appliances and maintenance, transport and communication, recreation and culture) 14 12 10 8 6 4 2 0 -2 -4 -6 -8 14 12 10 8 6 4 2 0 -2 -4 -6 -8 1234123412341234123412341234 2007 2008 2009 2010 2011 2012 2013 * Calculated as the weighted average of total wages paid in industrial, construction, trade, accommodation, catering, information, communication, professional scientific and technical activities and administrative and support services activities. Deflated by CPI. Source: TurkStat Short-Term Labor Statistics, CBRT. Services 25 25 20 20 15 15 10 10 5 5 0 0 -5 -5 -10 -10 1234123412341234123412341234 2007 2008 2009 2010 2011 2012 2013 * Calculated as the ratio of total wages to turnover for the services and the ratio of total wages to production and the relevant PPI for the industrial sectors. Source: TurkStat Short-Term Labor Statistics, CBRT. In sum, non-farm employment increased and the unemployment rate receded in the last quarter of 2013 and in January 2014. Unemployment rates declined in January amid higher employment in construction and services, while industrial employment continued to present a modest outlook. Leading indicators point to a mild increase in non-farm employment in the first quarter of 2014. However, the recent tightening in financial conditions, which may deteriorate economic activity in the upcoming period, is viewed to be a potentially restraining factor on the improvement in employment conditions. 38 Inflation Report 2014-II Central Bank of the Republic of Turkey Box 4.1 Revisions to Construction Investment Expenditures This box presents an analysis of revisions to construction investment expenditures, which is a component of national income. Construction investment expenditures are decomposed as public and private in the GDP news bulletin and released quarterly by the TurkStat. Public construction investments pertaining to the first three quarters of the year are temporary and are measured using data from the central government, local administrations and social security institutions, which are compiled on a collection basis via surveys. Final data on public investments are calculated using the finalized accounts of these institutions and released in the last-quarter bulletin of the respective year. Thus, measurement of data in the last-quarter GDP bulletin is on an accrual basis rather than on a collection basis, which leads to quite notable revisions in previously announced data on construction investments for the first three quarters of the year.1 This study uses data on construction investments with base year 1998, covering the 2008Q1-2013Q4 period. The study compares 3-quarter construction investments data released in the third-quarter bulletin to the construction investments of the first three quarters released in the last-quarter bulletin, as public and private investment expenditures are not subject to any notable retrospective revision in the second and third quarters of the year. In other words, the public and private construction investment data in the third-quarter GDP bulletin are quite close to those in the first and second-quarter bulletins. Hence, the last-quarter GDP bulletin data are only compared to the third-quarter GDP bulletin data. While construction investments in the last-quarter bulletins are not subject to any noticeable retrospective revisions in total, the distinction between private and public construction investments can be apparent. In other words, total construction investments for the first three quarters are not revised significantly in the finalquarter GDP bulletins as revisions to public construction investments are offset by revisions to private construction investments. Table 1 presents the annual percentage changes in public, private and total construction investment expenditures released in the third and fourth-quarter GDP bulletins.2 Accordingly, the annual growth rate of public construction expenditures in 2013Q1, which was announced to be 81.8 percent in the 2013Q3 bulletin, was revised as 46.2 percent in the 2013Q4 bulletin. Thus, the growth rate of public construction investment expenditures was revised downwards by 35.6 percentage points. On the other hand, the first-quarter annual growth rate of private construction investment expenditures for 2013 was revised upwards by 9.1 percentage points (from -13.9 percent to -4.8 percent) in the final-quarter bulletin (Chart 1). In terms of level, revisions to public and private construction investment expenditures are in reverse directions, which cancel each other (Chart 2). This shows that revisions are distributed evenly between public and private. Hence, evaluating construction investments on the basis of public and private distinction may not be accurate by using data released in the first three quarters of the year, while data on total construction expenditures may prove to be more reliable. 1 For further information on construction investment expenditures, see TurkStat (2012). further information on national income revisions, see Günay (2011). 2 For Inflation Report 2014-II 39 Central Bank of the Republic of Turkey Table 1. Annual Growth Rates of Public, Private and Total Construction in Q3 and Q4 Bulletins Public Construction 2008Q3 2008Q4 Bulletin Bulletin -14.0 17.3 -25.2 11.3 22.0 1.3 15.1 2009Q3 2009Q4 Bulletin Bulletin 24.2 10.4 10.7 4.6 -9.2 -2.7 -1.0 2010Q3 2010Q4 Bulletin Bulletin -26.5 18.8 18.1 19.7 17.9 14.3 15.8 2011Q3 2011Q4 Bulletin Bulletin 6.0 0.4 3.7 -2.0 9.7 3.8 -8.1 2012Q3 2012Q4 Bulletin Bulletin 0.4 -4.2 -6.3 2.3 6.0 -1.0 7.4 2013Q3 2013Q4 Bulletin Bulletin 81.8 46.2 37.1 25.2 11.5 21.2 29.2 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 Private Construction 2008Q3 2008Q4 Bulletin Bulletin 4.8 -6.5 7.0 -9.0 -12.8 -12.5 -20.4 2009Q3 2009Q4 Bulletin Bulletin -28.7 -25.2 -31.6 -29.1 -21.8 -23.3 -8.8 2010Q3 2010Q4 Bulletin Bulletin 19.7 4.8 22.9 19.9 26.8 25.1 19.1 2011Q3 2011Q4 Bulletin Bulletin 18.2 21.0 17.6 20.1 11.6 13.2 12.3 2012Q3 2012Q4 Bulletin Bulletin 3.0 4.0 1.8 -1.7 -3.1 -0.3 -0.4 2013Q3 2013Q4 Bulletin Bulletin -13.9 -4.8 -3.8 0.8 7.5 3.5 -2.0 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 Total Construction 2008Q3 2008Q4 Bulletin Bulletin 1.1 -2.0 -1.4 -3.7 -3.4 -8.7 -12.3 2009Q3 2009Q4 Bulletin Bulletin -16.5 -17.0 -18.9 -19.0 -18.0 -17.1 -6.5 2010Q3 2010Q4 Bulletin Bulletin 5.6 8.6 21.0 19.8 23.7 21.0 18.0 2011Q3 2011Q4 Bulletin Bulletin 14.6 14.8 12.4 11.8 10.9 9.8 5.3 2012Q3 2012Q4 Bulletin Bulletin 2.3 1.8 -0.8 -0.4 0.0 -0.5 2.0 2013Q3 2013Q4 Bulletin Bulletin 10.1 8.1 10.0 9.1 8.9 9.6 8.0 Source: TurkStat. Chart 1. Revisions to Annual Percentage Changes in Public, Private and Total Construction Investments between Q3 and Q4 Chart 2. Revisions to Public, Private and Total Construction Investments between Q3 and Q4 (Fixed Prices, Thousand TL ) 50 Public 40 Private 30 Total 50 250 40 200 30 150 20 20 10 10 0 0 -10 -10 -20 2008Q1 2008Q2 2008Q3 2009Q1 2009Q2 2009Q3 2010Q1 2010Q2 2010Q3 2011Q1 2011Q2 2011Q3 2012Q1 2012Q2 2012Q3 2013Q1 2013Q2 2013Q3 -40 Private Total 250 200 150 100 100 50 50 0 0 -50 -50 -30 -100 -100 -40 -150 -150 -20 -30 Public -200 Thousands (Percentage Points) -200 2012Q4 2013Q1 2013Q2 2013Q3 Source: TurkStat, CBRT. 40 Inflation Report 2014-II Central Bank of the Republic of Turkey Revisions significantly change the course of seasonally adjusted data as well (Charts 3 and 4). In seasonally adjusted terms, data in third-quarter bulletin of 2013 signal a sharper contraction in private construction expenditures than the quarterly contraction experienced during the global crisis. However, the revised data in the last-quarter bulletin indicate a more limited contraction in private construction expenditures in the first quarter. Meanwhile, public construction investments, which displayed a rapid rise in the first quarter, were revised downwards to exhibit a modest growth.3 Chart 3. Public Expenditures on Construction Investments Chart 4. Private Expenditures on Construction Investments (Seasonally Adjusted, Fixed Prices) (Seasonally Adjusted, Fixed Prices) 2013Q3 16 2013Q4 15 15 14 14 13 13 12 12 11 11 10 10 9 9 8 8 7 7 1 2 3 2011 4 1 2 3 2012 4 1 2 3 22 x 100000 16 2013Q3 22 2013Q4 21 21 20 20 19 19 18 18 17 17 16 2013 16 1 2 3 2011 4 1 2 3 2012 4 1 2 3 2013 Source: TurkStat, CBRT. In sum, total construction investments are not subject to a major revision in the last-quarter GDP bulletin, while public and private construction investments were revised significantly. This calls for caution in evaluating data on public and private construction investments, which are released in the first three quarters; whereas assessments using data on total construction investments are considered to be more reliable in the first three quarters. REFERENCES Günay, M., 2011, Milli Gelir Güncellemeleri (in Turkish), CBT Research Notes in Economics No. 11/21. TurkStat, 2012, Üretim ve Harcama Yöntemiyle Gayri Safi Yurtiçi Hasıla Tahminleri, Kavram, Yöntem ve Kaynaklar (in Turkish), TurkStat Publication No. 3662. Last-quarter data on construction investments announced in 2013 are seasonally adjusted and the seasonal factors are obtained. In the next step, construction investments data released in 2013Q3 are seasonally adjusted using these factors in order to eliminate the effect of retrospective revisions that may arise from seasonal adjustment. 3 Inflation Report 2014-II 41 Central Bank of the Republic of Turkey Box Capital Flows Towards Turkey and Emerging Economies in 2013: Effects of the Fed’s 4.2 Policy Change In the post-crisis period, additional monetary easing measures taken by central banks of advanced economies, particularly the Fed, invigorated the expectations that low interest rate and ample liquidity conditions would be maintained for a long time in these economies. This caused an improvement in global risk perceptions and an increased attraction of investors to risky assets with high returns. Meanwhile, given the low course of economic growth in advanced economies, the high growth performance and the relatively high interest rates in emerging economies supported this trend and accelerated portfolio flows to emerging economies, particularly Turkey. However, two major developments that adversely affect the capital flows towards emerging economies and Turkey have been experienced since the global crisis in 2008: 1) In the third quarter of 2011, increased concerns over the sustainability of public debt in the Euro Area, particularly Greece, led to marked downside risks in the global economy. Accordingly, capital flows towards emerging economies lost pace in tandem with the deterioration in the risk appetite, which adversely affected the capital flows towards Turkey as well. 2) In May 2013, the Fed announced that asset purchases, the major pillar of its quantitative easing policy, would be gradually cut and terminated in mid-2014. The associated uncertainty regarding the normalization of the Fed’s monetary policy strengthened the perception that the ample liquidity conditions in global markets would end. This caused capital outflows from emerging economies, including Turkey, with high external financing needs. Against this background, this box gives an analysis of the effects of the Fed’s decisions regarding the normalization of its monetary policy and its resort to forward guidance on the capital flows to Turkey and emerging economies across 2013. Chart 1. Capital Flows to Turkey (12-Month Cumulative, Billion USD) Other (FDI+Bond Issues+Loans) 100 80 80 60 60 40 40 20 20 0 0 -20 0108 0408 0708 1008 0109 0409 0709 1009 0110 0410 0710 1010 0111 0411 0711 1011 0112 0412 0712 1012 0113 0413 0713 1013 -20 Thousands Portfolio Flows (Equity+Government Bonds+Bank Deposits) 100 Source: CBRT. 42 Inflation Report 2014-II Chart 3. Subcategories of Capital Flows Affected by the Fed’s Decision (12-Month Cumulative, Billion USD) (12-Month Cumulative, Billion USD) 60 50 50 40 40 30 30 20 20 10 10 0 0 -10 -20 -20 0108 0508 0908 0109 0509 0909 0110 0510 0910 0111 0511 0911 0112 0512 0912 0113 0513 0913 -10 50 Equity Government Bonds Bank Deposits 50 40 40 30 30 20 20 10 10 0 0 -10 -10 0108 0508 0908 0109 0509 0909 0110 0510 0910 0111 0511 0911 0112 0512 0912 0113 0513 0913 Private Sector Loans Bank Loans Bond Issues (Public+Private) FDI 60 Thousands Chart 2. Subcategories of Capital Flows Unaffected by the Fed’s Decision Thousands Central Bank of the Republic of Turkey Source: CBRT. Chart 1 shows the subcategories of capital flows towards Turkey on an annual basis. Accordingly, three findings stand out for 2013. Firstly, capital flows displayed a steady and gradual increase until May 2013. Secondly, capital inflows started to decelerate as of May. Thirdly, this deceleration was not even across subcategories. This last finding needs further discussion. In other words, short-term financing items experienced outflows since May 2013 that have been driven by portfolio flows, which are composed of equity, government bonds and bank deposits. On the other hand, foreign direct investments, bond issues, bank loans and private sector loans, which are considered to be relatively reliable sources for the financing of the current account deficit in Turkey continued on a steady uptrend (Charts 2 and 3). Meanwhile, rollover ratios of long-term loans by banks and the private sector also increased following May. In fact, this ratio, which stood at 110 on average in the January-April period of 2013, went above 130 in the May-June period. Accordingly, even though total capital inflows lost pace due to portfolio flows after the Fed’s announcement in May, financing of the current account deficit was mostly provided by long-term resources. Meanwhile, other emerging economies also experienced portfolio outflows following the Fed’s announcement in May. An analysis of 12-month cumulative portfolio flows reveals that these outflows were largely driven by equity and bonds, with more severe outflows in the latter. In this period, Turkey followed a course similar to other emerging economies with respect to outflows in equity funds, while experiencing a relatively lower outflow in bond funds.4 Also, compared to the Euro Area crisis in 2011 when sudden capital outflows were experienced, Turkey saw a relatively limited effect on portfolio outflows (Charts 4 and 5). 4 Some portion of the fall in portfolio investments towards emerging economies and Turkey were also driven by price changes. Inflation Report 2014-II 43 Central Bank of the Republic of Turkey Chart 4. Flows of Equity Funds Chart 5. Flows of Bond Funds (12-Month Cumulative, Billion USD) (12-Month Cumulative, Billion USD) Turkey (right axis) 10 60 50 40 40 30 30 4 20 20 2 10 10 0 0 1213 0713 0213 0912 -30 0412 -20 -30 1111 -10 -20 0611 1213 0713 0213 0912 0412 1111 0611 0111 0810 0310 1009 0509 -4 1208 -60 0708 -2 0208 -40 -10 0111 0 -20 0810 0 0310 20 1009 40 0509 6 1208 8 60 Turkey 50 0708 80 Emerging Economies* 60 0208 Emerging Economies* 100 * Includes 40 emerging economies with Brazil, China, Colombia, Hungary, Indonesia, Malaysia, Mexico, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey having share above 2 percent. Source: EPFR, CBRT. In sum, following the Fed’s announcement on its taper of asset purchases as part of a gradual exit from the quantitative easing policy, Turkey and other emerging economies experienced capital outflows in the second half of the year that were mostly driven by portfolio investments. Two major points stand out regarding capital flows towards Turkey in this period. Firstly, the deceleration in capital flows was mostly seen in short-term items like equity, bonds and deposits, while other main categories (loans, FDI, bond issues) did not experience a notable change. Secondly, equity and bond funds, which saw outflows, exhibited a less negative course compared to emerging economies. Accordingly, in terms of capital flows, Turkey did not unfavorably diverge from other emerging economies. These points indicate that capital flows towards Turkey and other emerging economies slowed mainly upon push factors (the deterioration in the global risk appetite) rather than country-specific pull factors in the second half of 2013. Hence, the Fed’s decisions on normalizing its monetary policy are expected to remain as a determinant factor in the course of capital flows towards emerging economies. 44 Inflation Report 2014-II