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Central Bank of the Republic of Turkey
2. International Economic Developments
In the second quarter of 2015, global economic activity remained weak due to the sluggish
growth of emerging economies. The ongoing deceleration in the Chinese economy and its
implications for the commodity market and global trade continued to dampen the growth outlook in
emerging economies. In fact, the growth forecasts for commodity-exporting emerging economies
which have close trade ties with China have been revised downward recently. On the advanced
economies front, the moderate growth continued into the second quarter, especially in the US and the
Euro area. Yet, lower commodity prices weighed on commodity-exporting advanced economies as
well. China’s growth performance appears to be one of the major downside risks to the global
economic activity for the upcoming period. Thus, in case the Chinese economy continues to slow
down, resulting in even more slide in China’s imports, commodity prices may slump further and global
trade may remain subdued, causing the global economic outlook to remain sluggish for some time.
The fall in commodity prices, especially energy, persisted into the third quarter, which was mostly
driven by stagnant Chinese economy and the weak course of demand in emerging economies. These
effects are expected to pull commodity prices down further in coming months. Plunging oil and
commodity prices continue to repress inflation rates across advanced economies. Additionally,
exchange rate developments in advanced economies also pose downward pressure on inflation rates.
On the other hand, the slump in commodity prices triggers capital outflows from commodity-exporting
emerging economies, driving exchange rates and thus inflation rates higher. Assuming that the Chinese
economy continues to grow mildly and the Fed decides not to hold off rate hikes for a long time, the
divergence between inflation rates in advanced and emerging economies may continue into the
upcoming period.
The third quarter was marked by risk aversion due to the Chinese slowdown, the weak growth in
emerging economies and the expectations of a Fed rate hike; while emerging economies saw
increasing capital outflows during the same period. Despite downside risks to their growth outlook, most
emerging market central banks kept policy rates constant amid weaker capital flows and uncertainties
over global monetary policies. The relatively tepid readings on the recovery of the US economic
activity and labor market and the likely spillovers from the global slowdown to the US economy signal
that the first rate hike, which was supposed to happen before the end of the year, will take place in the
first quarter of 2016 at the earliest. Although the delay in the Fed rate hike might spur capital flows into
emerging economies, the weak growth outlook for emerging economies remains the key downside risk
to capital inflows.
2.1. Global Growth
Global economic activity continued to decelerate through the second quarter mostly due to
the ongoing sluggish growth in emerging economies (Chart 2.1.1). The Chinese economy slowed
further, whereas Russian and Brazilian contraction deepened. In this period, the annual growth rate of
emerging economies turned negative in Eastern Europe and approached zero in Latin America
(Chart 2.1.2). On the other hand, advanced economies, especially the US and the Euro area,
displayed a positive growth performance, recording a quarter-on-quarter increase in the second
quarter (Chart 2.1.1).
Inflation Report 2015-IV
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Central Bank of the Republic of Turkey
Chart 2.1.1.
Chart 2.1.2.
Global Growth Rates*
Regional Growth Rates*
(Annual Percent Change)
(Annual Percent Change)
Latin America
Asia
Eastern Europe
Emerging Economies
Advanced Economies
10
10
Global GDP
6
6
2
2
-2
-2
-6
1234123412341234123412341234123412
2007 2008 2009 2010 2011 2012 2013 2014 15
12
9
9
6
6
3
3
0
0
-3
-3
-6
-6
-9
-6
-9
23412341234123412341234123412
2008 2009
* Weighted by each country’s share in global GDP.
Source: Bloomberg, CBRT.
12
2010
2011
2012
2013
2014 15
* Weighted by each country’s share in regional GDP.
Source: Bloomberg, CBRT.
The global PMI data of the third quarter signal a persistent global economic slowdown
(Chart 2.1.3). The readings on the US and Euro area manufacturing industry PMI suggest that both
economies continued to experience a positive growth performance in the third quarter but at a
decelerating pace (Chart 2.1.4). Specifically, the worse-than-expected US non-farm employment data
of August and September and the resulting year-on-year drop in job openings reflect the slowing US
growth. Meanwhile, the Japanese manufacturing industry PMI turned favorable in the third quarter
(Chart 2.1.4). Both this PMI outlook and the base effect indicate that Japan might see a positive
annual growth rate in the third quarter.
The emerging markets PMI for manufacturing and services continued to decline in the third
quarter (Chart 2.1.5). The manufacturing PMI data for China, Poland and Mexico were particularly
down quarter-on-quarter. Moreover, financial markets became highly volatile amid worries about
China while emerging economies faced capital outflows. Therefore, the slowing economic activity
across emerging economies is expected to continue into the third quarter of 2015.
Chart 2.1.3.
Chart 2.1.4.
Global PMI
Manufacturing Industry PMI
Services
58
58
Manufacturing
Euro Area
USA
Japan
60
56
0715
0315
1114
0714
0314
1113
0713
0313
1112
0712
48
0312
48
1111
50
0711
50
0311
52
1110
52
0710
54
0310
54
55
55
50
50
45
45
40
40
0310
0710
1110
0311
0711
1111
0312
0712
1112
0313
0713
1113
0314
0714
1114
0315
0715
56
60
Source: Markit.
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Inflation Report 2015-IV
Central Bank of the Republic of Turkey
In sum, the global economy might continue to slow in the third quarter due to emerging
economies. The October Consensus Forecasts bulletin shows that growth forecasts for 2015 hardly
changed in the inter-reporting period (Table 2.1.1). Yet, on the advanced economies front, growth
forecasts for 2015 were revised upward for the US and downward for Japan. On the emerging
economies side, year-end growth forecasts for both 2015 and 2016 were revised downwards,
particularly for Latin America (Table 2.1.1). Accordingly, the annual growth rate of the export-weighted
global production index revised by October forecasts declined from the previous reporting period,
which signals further weakness in Turkey’s external demand in the upcoming period (Chart 2.1.6).
Table 2.1.1.
Growth Forecasts for end-2015 and end-2016
(Annual Percent Change)
July
Global
Advanced Economies
USA
Euro Area
Germany
France
Italy
Spain
Japan
UK
Emerging Economies
Asia-Pacific
China
India
Latin America
Brazil
Eastern Europe
Russia
October
2015
2.6
2016
3.1
2015
2.5
2016
2.9
2.4
1.5
1.9
1.2
0.7
3.0
1.0
2.5
2.8
1.8
1.9
1.6
1.2
2.6
1.7
2.4
2.5
1.5
1.8
1.1
0.8
3.2
0.6
2.5
2.6
1.7
1.9
1.5
1.3
2.7
1.3
2.4
5.9
6.8
7.7
0.0
-1.6
0.0
-3.5
6.0
6.7
8.0
1.5
0.6
2.1
0.4
5.8
6.8
7.5
-0.7
-2.8
-0.1
-3.9
5.7
6.5
7.8
0.5
-1.0
1.7
-0.1
Source: Consensus Forecasts.
Chart 2.1.5.
Chart 2.1.6.
Emerging Markets PMI
Export-Weighted Global Production Index*
(Annual Percent Change)
Services
58
58
Manufacturing
56
56
54
54
52
52
6
July Inflation Report Forecast at 1.89
4
4
2
2
0
-2
-2
-4
0715
0315
1114
0714
0314
1113
0713
0313
1112
0712
0312
1111
0711
-6
0311
48
1110
48
0710
-4
0310
50
Inflation Report 2015-IV
0
October Inflation Report Forecast at 1.87
50
Source: Markit.
6
-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 2 3 4 1
2008
2009
2010
2011
2012
2013
2014 2015
* Weighted by each country’s share in Turkey’s exports.
Source: Bloomberg, CBRT.
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Central Bank of the Republic of Turkey
2.2. Commodity Prices and Global Inflation
In the third quarter of 2015, the headline commodity price index dropped by 18.5 percent from
the end of the previous quarter. In this period, precious metal prices remained horizontal while energy
prices, industrial metal prices and agricultural prices slumped by 23.2, 9.5 and 11 percent, respectively,
largely due to shortage of demand from emerging economies, particularly China. Although strikingly
low commodity prices call for a correction in commodity supply, the rather slow correction, especially
in the oil market, adds to the downside pressure on commodity prices (Chart 2.2.1).
Chart 2.2.1.
Chart 2.2.2.
S&P Goldman Sachs Commodity Price Indices
Crude Oil (Brent) Prices*
(January 2014=100)
(USD/bbl)
Source: Bloomberg.
60
60
40
40
0716
80
0116
80
0715
40
100
0115
40
100
0714
60
120
0114
60
120
0713
80
1015
80
0715
100
0415
100
0115
120
1014
120
0714
140
0414
140
0114
24 July 2015
23 October 2015
Spot
Energy
Precious Metals
0113
Headline
Industrial Metals
Agriculture
* 24 July 2015 and 23 October 2015 denote the arithmetic mean of the
prices quoted at futures contracts during 1-24 July 2015 and 1-23
October 2015, respectively.
Source: Bloomberg.
Oil prices plummeted in the third quarter. With low oil prices beginning to have more evident
negative implications on oil-exporting countries, China’s expansionary economic policy and mounting
concerns about the sustainability of OPEC’s low price policy appear to have minimal impact on oil
prices. Similarly, rising geopolitical risks in the Middle East affected oil prices only slightly. Thus,
December 2015 contracts for Brent crude oil, which were traded at 59 USD on average in July, have
been trading at 49.9 USD on average as of 23 October (Chart 2.2.2). Whether OPEC and non-OPEC oil
exporters will announce a policy change to reduce oil supply and how geopolitical risks will unfold are
among the main factors to shape oil prices in the upcoming period. While the US shale oil industry faces
a contraction, Iran’s likely return to the international oil market may balance the supply. Against this
background, the global supply glut will support the current level of oil prices in the short term.
In the inter-reporting period, inflation rates were down across advanced and emerging
economies amid falling oil prices. Core inflation rates, on the other hand, edged up in both country
groups (Charts 2.2.3 and 2.2.4). Meanwhile, inflation soared in some commodity-exporting economies
such as Russia, Brazil and Argentina.
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Inflation Report 2015-IV
Central Bank of the Republic of Turkey
Chart 2.2.3.
Chart 2.2.4.
CPI Inflation in Advanced and Emerging Economies
Core Inflation in Advanced and Emerging Economies
(Annual Percent Change)
(Annual Percent Change)
Emerging Economies
Emerging Economies
8
5
6
6
4
4
4
4
3
3
2
2
2
2
0
0
1
1
-2
-2
0
0
0315
0914
0314
0913
0313
0312
0911
0311
0910
0315
0914
0314
0913
0313
0912
0312
0911
0311
0910
Source: Bloomberg, CBRT.
5
Advanced Economies
Advanced Economies
0912
8
Source: Bloomberg, DataStream, CBRT.
Global inflation expectations for end-2015 and end-2016 were revised upwards for emerging
economies compared to the previous reporting period. Advanced economies, on the other hand, saw
a modest downward revision. The rising inflation expectations for emerging economies were mostly
fueled by Latin America and Eastern Europe. In particular, inflation expectations worsened further in
Brazil and Russia (Table 2.2.1).
Falling prices of oil and other commodities continue to dampen inflation rates across advanced
economies. For commodity-exporting emerging economies on the other hand, this downtrend drives
inflation higher by worsening expectations. Meanwhile, exchange rate developments reinforce the
course of inflation in related country groups. More specifically, the appreciating USD curbs the US
inflation while the depreciating currencies of emerging economies, such as Russia and Brazil, push
inflation rates higher in these countries. Assuming that the economic growth continues to slow down
across the globe and especially in China, a major commodity importer, and the Fed starts to hike
policy rates soon, the current inflation outlook may remain unchanged – repressed in advanced
economies and elevated in emerging economies – in the short term.
Table 2.2.1.
Inflation Forecasts for end-2015 and end-2016
(Annual Percent Change)
July
Global
Advanced Economies
USA
Euro Area
Germany
France
Italy
Spain
Greece
Japan
UK
Emerging Economies
Asia-Pacific
China
India
Latin America
Brazil*
Eastern Europe
Russia
October
2015
2.6
2016
3.1
2015
3.2
2016
3.6
0.2
0.2
0.6
0.3
0.2
-0.2
-1.3
0.2
0.8
2.2
1.3
1.6
1.2
1.1
1.1
0.3
1.6
1.1
0.2
0.1
0.3
0.1
0.1
-0.4
-1.3
0.1
0.8
1.8
1.1
1.4
1.0
0.9
0.9
2.1
1.4
0.8
2.0
1.4
5.4
14.5
8.4
8.0
12.0
2.5
1.9
5.6
12.0
5.5
5.6
6.8
2.0
1.6
5.0
24.6
9.7
8.4
13.1
2.6
2.1
5.4
25.1
6.1
5.8
7.2
* December to December.
Source: Consensus Forecasts.
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Central Bank of the Republic of Turkey
2.3. Financial Conditions, Risk Indicators and Capital Flows
Following the ongoing global economic slowdown in the third quarter, concerns about the
Chinese economy and the approaching date of a likely Fed rate hike caused the global risk appetite
to decline sharply (Chart 2.3.1). However, owing to the end-August policy rate cut of the People's Bank
of China and the Fed’s subsequent hints for delaying the first rate hike further, investors’ deteriorating
appetite for risk was reversed (Chart 2.3.2). With rising risk aversion and the recent worse-than-expected
non-farm employment in the US as well as fears of possible spillovers from the global economic
slowdown into the US economy, financial markets’ expectations for the Fed's first policy rate hike were
pushed to 2016.
Chart 2.3.1.
Chart 2.3.2.
Exchange Rate Volatility
Policy Rate Projections of the FOMC Members
(Basis Points)
(Median, Percent)
VXY Volatility Index
17 September 2015
EM-VXY Volatility Index
17 June 2015
19 March 2014
3.0
2.5
2.5
9
9
2.0
2.0
8
8
1.5
1.5
7
7
1.0
1.0
6
6
0.5
0.5
5
5
0915
3.0
10
0715
11
10
0515
11
0315
3.5
0115
3.5
1114
12
0914
12
0714
4.0
0514
4.0
0314
13
0114
13
0.0
0.0
2015
Source: Bloomberg, JP Morgan.
2016
2017
Longer-Term
Source: Fed.
Amid a growing market sentiment that the Fed would delay the rate hike as well as
expectations of continued monetary easing by other major central banks, long-term returns in
advanced economies began to fall again in July (Chart 2.3.3). Yet, downturn in the stock markets of
both advanced and emerging economies, which had been accelerating since August, was replaced
by a rebound in October.
Chart 2.3.3.
Chart 2.3.4.
10-Year Treasury Bond Yields
Weekly Fund Flows to Emerging Economies
(Percent)
(Billion USD)
Germany
USA
UK
Japan
3.5
Equity Funds
3.5
Bond Funds
15
150
52-Week Cumulative Fund Flow (right axis)
3.0
10
2.5
2.5
5
2.0
2.0
0
1.5
1.5
-5
1.0
1.0
-10
0.5
0.5
-15
-100
0.0
0.0
-20
-150
3.0
100
50
Source: Bloomberg.
18
0915
0715
0515
0115
0315
1114
0914
0714
0514
0114
0314
1113
0913
0713
0513
-50
0113
0313
0915
0515
0115
0914
0514
0114
0913
0513
0113
0
Source: EPFR.
Inflation Report 2015-IV
Central Bank of the Republic of Turkey
The recent rapid decline in the global risk appetite worsened the risk sentiment toward
emerging economies, causing emerging market risk premiums to rise markedly in Asia-Pacific and Latin
America until the end of September (Chart 5.1.1). This increase in risk premiums ended as of October
after lowered expectations for a Fed rate hike. Accordingly, international investors grew more risk
averse in August and September, and stock and bond markets in emerging economies saw sizeable
outflows in the third quarter (Chart 2.3.4). Despite losing some momentum after September’s FOMC
meeting, these outflows continued until October. Capital flows are expected to be heavily influenced
by the Fed’s policy decisions and hints in the upcoming period. Signals of a further delay in the muchanticipated Fed rate hike seem to drive capital flows into emerging economies but the ongoing
uncertainty about the timing of this policy rate increase and the weak growth outlook for emerging
economies, especially China, contribute to the downside risks to emerging market capital inflows.
2.4. Global Monetary Policy
In the third quarter of 2015, global monetary policy decisions generally reflected unchanged
policy rates. On the advanced economies front, after the Bank of Canada and the Sveriges Riksbank
opted for a policy rate cut in July, the Reserve Bank of New Zealand and the Norges Bank lowered their
policy rates by 25 basis points each in September (Chart 2.4.1). Emerging economies displayed a similar
pattern, with the Magyar Nemzeti Bank and the Central Bank of Brazil deciding to keep policy rates
constant at their September meetings after a prolonged stable cut in Hungary and a steady increase
in Brazil. However, the People’s Bank of China lowered its policy rate by 25 basis points in August and
the Reserve Bank of India opted for a rate cut of 50 basis points in September, whereas the Central
Reserve Bank of Peru and Central Bank of Colombia hiked their policy rates by 25 basis points each in
September and the Central Bank of Chile favored a 25 basis point rate increase in October
(Chart 2.4.2).
Chart 2.4.1.
Chart 2.4.2.
Policy Rate Changes in Advanced Economies
between January 2014 and October 2015* (Basis Points)
Policy Rate Changes in Emerging Economies between
January 2014 and October 2015* (Basis Points)
October 2015
August 2015
2015Q2
2014
100
75
September 2015
July 2015
2015Q1
100
75
1000
September 2015
July 2015
2015Q1
1250
1000
50
500
500
250
250
0
0
Mexico
Romania
Turkey
-750
South Africa
-500
-750
Russia
-500
Hungary
-250
Indonesia
-250
Poland
-125
Canada
-125
Czech Republic
-100
Euro Area
-100
Norway
-75
Australia
-75
Korea
-50
Sweden
-50
Israel
-25
Colombia
0
Peru
0
-25
750
Thailand
25
Chile
25
750
Brazil
50
October 2015
August 2015
2015Q2
2014
1250
* As of 23 October 2015.
Source: Bloomberg, CBRT.
The fact that the Fed’s September meeting delivered no rate hike had major implications for
global monetary policy. The post-meeting statement of the FOMC underlined that economic
conditions had yet to warrant a policy rate increase but indicated that a policy rate hike would be
Inflation Report 2015-IV
19
Central Bank of the Republic of Turkey
likely over the remainder of the year. The timing and pace of a Fed rate hike remains crucial to
financial markets. According to the forecasts announced in the September statement, the FOMC
members lowered their expectations for the federal funds rate at all maturities; yet the expectation for
a one-off rate hike in 2015 is still valid, albeit less strong (Chart 2.3.2). In conclusion, market expectations
for the federal funds rate were revised significantly downward compared to the previous reporting
period, with forecasts for the first rate hike now being shifted into the first quarter of 2016 (Chart 2.4.3).
Chart 2.4.3.
US Federal Funds Futures
(Percent)
24 July 2015
2.0
2.0
9 October 2015
0618
0418
0218
1217
1017
0817
0617
0.0
0417
0.2
0.0
0217
0.4
0.2
1216
0.6
0.4
1016
0.8
0.6
0816
1.0
0.8
0616
1.2
1.0
0416
1.4
1.2
0216
1.6
1.4
1215
1.8
1.6
1015
1.8
Maturity
Source: Bloomberg.
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Inflation Report 2015-IV