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Central Bank of the Republic of Turkey
2. International Economic Developments
The first quarter of 2014 was marked by an ongoing moderate growth of global economic
activity, but the rate of growth slowed quarter-on-quarter. This slowdown was mainly attributed to the
US economy that shrank sharply amid severe weather conditions and emerging economies whose
growth rates were down from the previous quarter. Data on the second quarter of the year suggest
that the slowdown across emerging economies will persist, but global economic activity will remain
robust largely due to advanced economies. In fact, leading indicators for the US economy, one of the
main drivers of the course of global economic activity, point to growth in the second quarter after the
sharp contraction in the first quarter.
The effects of the global economic recovery on commodity prices, albeit marginal, have been
observed since the second quarter. The upsurge in industrial metal prices during this period was largely
driven by the recovery of the Chinese economy, while, in the upcoming period, the course of
commodity prices will be determined by the global economic recovery as well as the upward pressure
on oil prices triggered by geopolitical risks. In line with the rise in commodity prices, inflation rates
increased slightly from the previous reporting period across both advanced and emerging economies.
Nevertheless, as inflation rates still hover mostly below targets and economic recovery is yet to reach
the desired level, monetary policies in both advanced and emerging economies were on the easing
side in the second quarter.
It is remarkable that global financial markets were generally filled with optimism in the second
quarter although there was no significant improvement in global economic activity. In this period, the
risk appetite was favorable and the downtrend in capital flows to emerging economies reversed.
Despite the limited recovery across emerging economies, the reduced downside risks on the global
growth outlook and the favorable course of the risk appetite will encourage more portfolio flows into
these economies over the upcoming period. The lower prospect for a sooner-than-expected
tightening in monetary policy by the Fed compared to the previous reporting period will also support
capital flows to emerging economies in the forthcoming period. All these developments suggest that
the global monetary policy that was unexpectedly loose in the second quarter will tighten a little in the
rest of the year. This tightening will become more significant in 2015.
2.1. Global Growth
The global economy continued to recover in the first quarter of 2014, but the rate of growth was
slower than that in the fourth quarter of 2013 (Chart 2.1.1). The first-quarter slowdown of global growth
was essentially driven by the weather-related contraction in the US economy. However, the favorable
growth outlook for the Euro Area, one of Turkey’s biggest export destinations, continued into the first
quarter of the year. The pace of growth in emerging economies, on the other hand, slowed quarteron-quarter in the first quarter (Chart 2.1.2).
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Central Bank of the Republic of Turkey
Chart 2.1.1.
Chart 2.1.2.
Global Growth Rates*
Global Growth Rates*
(Annual Percent Change)
April (Export-Weighted)
July (Export-Weighted)
April (GDP-Weighted)
6
July (GDP-Weighted)
(Annual Percent Change)
Emerging Economies
Advanced Economies
6
4
4
2
2
0
0
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-2
-2
-4
-4
-4
-4
Actual
-6
-6
Forecast
12341234123412341234123412341234
2007 2008 2009 2010 2011 2012 2013 2014
-6
2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
-6
2008
2009
2010
2011
2012
2013 2014
* Weighted by each country’s share in Turkish exports and by each country’s share in global GDP for export-weighted growth and GDP-weighted growth,
respectively.
Source: Bloomberg, CBRT.
Second-quarter readings on global PMI suggest that the manufacturing industry was on a
negative growth path while the services sector was on a positive one, compared to the first quarter
(Chart 2.1.3). In this period, manufacturing PMI indices were down, especially in a large number of
emerging economies. Similarly, manufacturing PMI data for the Euro Area pointed to a quarter-onquarter decline in the second quarter. Yet, manufacturing PMI data for the US were more favorable in
this period. Combined with labor market data, these readings indicate that the US economy will
expand in the second quarter (Chart 2.1.4). In conclusion, the pace of growth in emerging economies
will continue to slow in the second quarter, while the Euro Area recovery may lose some momentum.
However, the global economic activity is expected to grow further in the second quarter mostly due to
advanced economies, particularly the US. The fact that capital flows to emerging economies were on
the rise during May and June is expected to have a positive effect on emerging economies and
therefore on the global economic activity in the upcoming period.
Chart 2.1.3.
Chart 2.1.4.
Markit Global PMI Indices
Manufacturing Industry PMI Indices
Services
Euro Area
Manufacturing
60
60
55
55
60
55
55
50
50
45
45
40
40
0314
1113
0713
0313
1112
0712
0312
1111
0711
0311
1110
0314
1113
0713
0313
1112
0712
0312
1111
0711
0311
1110
0710
45
0310
45
0710
50
0310
50
USA
60
Source: Markit.
In the July edition of Consensus Forecasts bulletins, end-2014 growth forecasts were revised
downwards for the US and the Euro Area and upwards for Japan and the UK compared with the
previous reporting period. Growth forecasts for emerging economies, on the other hand, were revised
downwards overall, except for China and India (Table 2.1.1). The duly-revised GDP and export-
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weighted global manufacturing indices indicate that the global economy will continue to grow in the
rest of the year, but the pace of growth will be slightly below the level projected in the previous
reporting period (Chart 2.1.1).
Table 2.1.1.
Growth Forecasts for end-2014 and 2015 (Average Annual Percent Change)
July
April
2014
2015
2014
2015
World
Advanced Economies
USA
Euro Area
Germany
France
Italy
2.9
3.2
2.6
3.2
2.7
1.2
1.9
0.9
0.6
3.0
1.5
2.0
1.3
1.1
1.6
1.1
2.0
0.7
0.3
3.0
1.6
2.0
1.2
1.1
Spain
Greece
Japan
UK
Emerging Economies
Asia-Pacific
China
India
Latin America
Brazil
Eastern Europe
1.0
0.1
1.3
2.8
1.5
1.5
1.3
2.4
1.1
0.2
1.5
3.0
1.7
1.8
1.3
2.6
6.0
7.3
5.4
2.2
1.8
1.7
6.1
7.2
6.0
2.8
2.0
2.8
6.0
7.3
5.4
1.9
1.5*
1.5
6.1
7.2
6.2
2.7
1.8*
2.6
* As of June.
Source: Consensus Forecasts.
2.2. Commodity Prices and Global Inflation
In the second quarter of 2014, the headline commodity price index displayed a quarter-onquarter increase of 1.5 percent. In this period, energy, industrial metal and precious metal prices rose
by 3.5, 7.5 and 3.4 percent, respectively, while agricultural prices dropped by 14.5 percent
(Chart 2.2.1).
Chart 2.2.1.
Chart 2.2.2.
S&P Goldman Sachs Commodity Prices
Crude Oil (Brent) Prices*
(January 2009=100)
Headline
Industrial Metals
Agriculture
200
(USD/bbl)
Energy
Precious Metals
Futures (April 25)
Spot
Futures (July 18)
40
40
60
60
Source: Bloomberg.
0110
0510
0910
0111
0511
0911
0112
0512
0912
0113
0513
0913
0114
0514
0914
0115
0515
0915
80
0514
80
0114
80
0913
80
0513
100
0113
100
0912
120
0512
120
0112
120
0911
120
0511
160
0111
160
0910
140
0510
140
0110
200
* April 25 and July 18 denote the arithmetical average of the prices
quoted at futures contracts during April 1-25, 2014 and July 1-18, 2014,
respectively.
Source: Bloomberg.
The global economic recovery appears to have become influential on commodity prices, albeit
only marginally. In addition, concerns over oil supply, coupled with geopolitical risks, continue to put
upward pressure on oil prices. Expectations for Brent crude oil prices, standing at 113 USD as of the end
of the second quarter, have also increased from the previous reporting period (Chart 2.2.2). The
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Central Bank of the Republic of Turkey
second-quarter rise in industrial metal prices is attributed to the favorable growth outlook for the
Chinese economy. Meanwhile, after the first-quarter increase, agricultural prices decreased
substantially in the second quarter amid the favorable course of production.
Compared with the previous reporting period, headline and core CPI inflation rates were up in
advanced economies, mostly on the back of Japan and the US. Emerging economies saw a similar
increase in their headline and core inflation rates, with core inflation showing a faster pace of increase
(Charts 2.2.3 and 2.2.4).
Chart 2.2.3.
CPI Inflation in Advanced and Emerging Economies
(Annual, Percent)
Chart 2.2.4.
Core Inflation in Advanced and Emerging
Economies
(Annual, Percent)
Emerging Economies
Emerging Economies
10
6
8
8
5
5
6
6
4
4
4
4
3
3
2
2
2
2
0
0
1
1
-2
-2
0
0
Source: Bloomberg, CBRT.
6
0314
0913
0313
0912
0312
0911
0311
0910
0310
0909
Advanced Economies
0309
0314
0913
0313
0912
0312
0911
0311
0910
0310
0909
0309
0908
Advanced Economies
0908
10
Source: Bloomberg, DataStream, CBRT.
End-2014 and end-2015 inflation forecasts were revised downwards for the Euro Area, the UK
and China and upwards for the US, Japan, Latin America and Eastern Europe (Table 2.2.1). Upside risks
on agricultural and oil prices and monetary easing policies across advanced economies continue to
pose a major risk to global inflation for the upcoming period.
Table 2.2.1.
Inflation Forecasts for end-2014 and 2015
(Average Annual Percent Change)
April
World
Advanced Economies
USA
Euro Area
Germany
France
Italy
Spain
Greece
Japan
UK
Emerging Economies
Asia-Pacific
China
India
Latin America
Brazil*
Eastern Europe
July
2014
3.0
2015
3.1
2014
3.2
2015
3.1
1.7
0.9
1.4
1.0
0.8
0.3
-0.9
1.9
2.6
1.9
1.3
1.8
1.3
1.1
1.0
-0.1
2.1
1.7
2.0
0.7
1.1
0.7
0.5
0.2
-0.9
1.7
2.7
2.1
1.2
1.8
1.1
0.9
0.8
-0.1
2.0
1.8
3.4
2.6
7.7
10.8
6.3
5.2
3.6
3
7.1
9.4
5.8
4.9
3.3
2.4
8.0
11.3
6.4**
5.4
3.5
2.9
6.9
10.0
6.0**
5.0
* December to December.
** As of June.
Source: Consensus Forecasts.
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Central Bank of the Republic of Turkey
2.3. Financial Conditions, Risk Indicators and Capital Flows
In the second quarter, despite ongoing concerns over global growth, the reluctance of the Fed
to signal a rate hike any time soon and its downward revision to long-term interest rate forecasts and
the ECB’s new package of easing measures led to a recovery in the global risk appetite (Chart 2.3.1).
As for the Fed funds futures contracts, the expected date of the first Fed funds rate increase remains
unchanged but the expected size of the rate hike has decreased slightly (Chart 2.3.2). This was mostly
due to the 25 basis-point cut in the Fed’s long-term interest rate projections despite its barely changed
monetary policy rhetoric. Moreover, this decrease in policy rate projections caused the US Treasury
bond yields to fall slightly in the medium to long term.
Chart 2.3.1.
Chart 2.3.2.
Global Risk Appetite
Fed Funds Futures
(Percent)
Credit Suisse Risk Appetite Index
VIX (inverted, right axis)
6
10
July 18
April 26
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.0
-8
45
0714
0117
0.0
0716
40
0116
-6
0715
0.5
0115
0.5
0714
35
0114
-4
0713
30
0113
-2
0712
25
0112
0
0711
20
0111
2
0710
15
0110
4
Maturity
Source: Bloomberg, Credit Suisse.
Source: Bloomberg.
Although there was no significant improvement in the global growth outlook, financial markets
were upbeat in the second quarter. In this context, thanks to the accommodative monetary policies of
major central banks, stock markets continued to appreciate in the second quarter across both
advanced and emerging economies. Moreover, yields on borrowing bills and bonds in emerging
economies receded amid the waning emerging market risk sentiment and the return of capital flows to
emerging economies (Chart 2.3.3).
Chart 2.3.3.
Chart 2.3.4.
Regional EMBI Developments*
Weekly Portfolio Flows to Emerging Economies
(Billion USD)
-10
-10
-15
-15
0714
-5
0414
-5
0114
0
1013
0714
0114
0713
0113
0712
0112
0711
100
0111
100
0710
200
0110
200
0
0713
300
5
0413
300
5
0113
400
Bond Funds
10
1012
400
Equity Funds
10
0712
500
Asia
Latin America
500
0412
Global
Europe
0112
(5-year)
* EMBI indices denote the yield spread of the USD-denominated bills and
bonds of countries over US Treasury bills and bonds.
Source: Bloomberg.
Inflation Report 2014-III
Source: EPFR.
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Central Bank of the Republic of Turkey
The ongoing downtrend in capital flows to emerging economies reversed in the second quarter.
Emerging economies, which experienced portfolio outflows as of May 2013 when the Fed first signaled
its exit from the quantitative easing program, have been witnessing significant inflows since April 2014
(Chart 2.3.4). This was owed to the moderate course of global economic activity and the favorable risk
appetite. Across portfolios, both equity and bond funds saw similar amounts of inflows.
Despite the slowing economic activity in emerging economies, the modest global growth
outlook and the favorable risk appetite are expected to encourage more portfolio flows into emerging
economies in the upcoming period. Yet, the likelihood of the Fed embarking on a sooner-thanexpected tightening with regard to its exit strategy from quantitative easing may pose a downside risk
to capital flows. Nevertheless, the ECB’s latest decisions are expected to affect capital flows in favor of
emerging economies.
2.4. Global Monetary Policy Developments
The slower-than-expected recovery in global economic activity caused a delay in the monetary
policy normalization process in the second quarter and gave rise to expectations that it would take a
longer time for policy rates to return to historical averages in advanced economies. The most
significant indicator of this development was, without doubt, the 10 basis-point cut in the ECB’s policy
rate in June. Moreover, Sveriges Riksbank also reduced its policy rate by 50 basis points in July
(Chart 2.4.1). On the emerging economies front, the tightening bias that was prevalent in the previous
reporting period particularly against the fluctuations in capital flows and exchange rates was replaced
by a more stabilizing, even easing bias (Chart 2.4.2).
Chart 2.4.1.
Chart 2.4.2.
Policy Rate Changes in Advanced Economies from Jan.
2012 to Jul. 2014* (Basis Points)
Policy Rate Changes in Emerging Economies from Jan.
2012 to Jul. 2014* (Basis Points)
0
-50
-50
-100
-100
Czech Rep.
Euro Area
Norway
-200
Australia
-200
Korea
-150
Sweden
-150
500
300
300
100
100
-100
-100
-300
-300
-500
-500
Mexico
50
0
2012
500
Romania
50
2013
700
Turkey
100
2014Q1
South Africa
100
Apr'14
Russia
150
May'14
Hungary
150
Jun'14
700
Indonesia
200
Israel
Jul'14
2012
Poland
2013
Colombia
2014Q1
Peru
Apr'14
Thailand
May'14
Chile
Jun'14
Brazil
Jul'14
200
* As of July 21, 2014.
Source: Bloomberg, CBRT.
The Fed continued to cut asset purchases by 10 billion USD at its two meetings in the second
quarter. In the statement following the FOMC meeting on June 18, it was reaffirmed that a highly
accommodative stance of monetary policy remains appropriate for a considerable time. Following
these developments, the expected date of the first rate hike was unchanged from the previous
reporting period, while the expected pace of rate hike declined to some extent. Meanwhile, yields on
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Inflation Report 2014-III
Central Bank of the Republic of Turkey
10-year bonds, an indicator for long-term interest rates, fluctuated for a while, particularly due to the
political tensions in Iraq, and settled around 2.5 percent as of end-July (Chart 2.4.3).
The ECB’s rate cut was mostly attributed to the inflation rate that has been hovering well below
the target. In an announcement, the ECB emphasized its aim to keep inflation low, though around 2
percent, and stated that the annual inflation of 0.5 percent as of May was well below the target. In
addition to delivering a rate cut, the ECB also adopted a number of measures to facilitate the
effective use of the credit channel. The most outstanding among these measures is to allow banks to
borrow from the ECB to finance a certain percentage of their loans to the private sector.
Chart 2.4.3.
Yields on 10-year US Treasury Bonds (Percent)
3.2
3.2
3.0
3.0
2.8
2.8
2.6
2.6
2.4
2.4
2.2
2.2
FOMC meeting (April 30)
2.0
2.0
1.8
1.8
1.6
1.6
FOMC meeting (June 18)
7/7/2014
6/7/2014
5/7/2014
4/7/2014
3/7/2014
2/7/2014
1/7/2014
12/7/2013
11/7/2013
9/7/2013
10/7/2013
8/7/2013
7/7/2013
6/7/2013
5/7/2013
4/7/2013
3/7/2013
1.2
2/7/2013
1.4
1.2
1/7/2013
1.4
Source: Bloomberg.
As for emerging economies, monetary policy strategy has displayed a more heterogeneous
pattern since 2013. Banco Central do Brasil and Bank Indonesia have been pursuing an aggressive
monetary tightening since early 2013, owing to the risks fuelled by the high current account deficit and
the aim to bring inflation closer to the target range. Other emerging market central banks, particularly
in Eastern Europe, continued to ease monetary policy in this period as inflation remained mostly below
the target. The first quarter of 2014 was marked by policy rate hikes across countries such as South
Africa, Turkey and India that have been facing current account deficits due to rising exchange rates
and capital outflows amid increased global uncertainty. Yet, monetary tightening glut came to a halt
in the face of reduced uncertainty and heightened expectations of prolonged monetary easing
across advanced economies, and only South Africa raised rates by 25 basis points in July.
In sum, both advanced and emerging economies saw monetary easing in the second quarter,
contrary to anticipations. However, as of July, expectations for the upcoming period point to some
tightening for both groups of economies in spite of the second-quarter easing (Charts 2.4.4 and 2.4.5).
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Central Bank of the Republic of Turkey
Chart 2.4.4.
Chart 2.4.5.
Expected Policy Rates in Advanced Economies
Expected Policy Rates in Inflation-Targeting
Emerging Economies (Percent)
(Percent)
Policy Rate
Policy Rate
Expected Policy Rate (April 2014)
Expected Policy Rate (April 2014)
Expected Policy Rate (July 2014)
0.90
0.80
Expected Policy Rate (July 2014)
0.90
0.80
0.70
0.70
0.60
0.60
0.50
6.75
6.75
6.50
6.50
6.25
6.25
6.00
6.00
5.75
5.75
5.50
5.50
5.25
5.25
5.00
5.00
0.50
0.40
0.40
0.30
0.30
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2011
2012
2013
2014
2015
4.75
4.75
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2011
2012
2013
2014
2015
Source: Bloomberg, CBRT.
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Inflation Report 2014-III