In December 2015, the Fed increased interest rates by 25 basis points in what was the first interest rate hike in 10 years.

Outlook for the World Economy
In 2015, the US economy continued to recover and the Federal Reserve Bank carried out its first interest rate hike, in line with expectations. However, growth in other developing countries, including China, started to flag, raising again concerns over the future of the world economy.

Expectations at the start of 2015
At the beginning of 2015, the US economy was expected to continue its recovery, while European and Japanese central banks were set to implement expansionary monetary policies and there was a general expectation that growth in the Chinese economy was about to slow.

The slowdown of Chinese economy compounded the effect of the lackluster global demand in the world, precipitating a serious decline in commodity prices, especially oil prices. This led to an increase in budget deficits in key oil exporters such as Russia, Saudi Arabia and Venezuela. In 2015, a year of increased geopolitical risks as well as low oil prices, capital outflows from Russia and Saudi Arabia gained pace.

The first interest rate hike in 10 years
The recovery in the employment market seen during 2015 increased hopes for the future of the US economy. In addition to the strong increase in non-agricultural employment, the rise in hourly wages, the improvement in growth and increase in core inflation strengthened the Fed’s hand in hiking interest rates even if inflation did not rise in line with the target. The Fed increased interest rates by 25 basis points in December 2015, in what was its first interest rate hike in 10 years. Despite this, there have been no episodes of serious turbulence in the world economy. The Fed had given plenty of warning before it hiked interest rates, thus directing world markets with its pronouncements and preventing sharp moves in global markets after the interest rate hike in December.

The Fed is expected to implement further rate hikes in the coming period. The Fed’s monetary policy will be steered by trends in the data related to employment and growth and, in particular, inflation.

A difficult year for Europe
2015 proved a difficult year for the European economy, due especially to economic problems in Greece which is a member of the Eurozone. Greece’s failure to post an economic recovery, the possibility that Greece would exit the European Monetary Union (EMU) and the debt crisis between creditors and the Tsipras Government that came to the power with populist rhetoric engaged the agenda in the Eurozone for a long time. After long negotiations, an agreement was reached for the construction of Greece’s debts.

The European Central Bank (ECB) implemented expansionist monetary policy in 2015. Sharp decline observed in commodity prices, mainly oil prices and continuing downward trend in the growth rate of the world economy increased the concerns of the ECB’s for the future. Therefore, with the decision it took, the ECB extended the bond purchase program worth of Euro 60 billion until March 2017, which it had planned to implement until September 2016. The bond purchase program is estimated to increase the ECB’s balance sheet by Euro 1.1 trillion.

Rapid slowdown in China’s economic growth
One of the most important developments of 2015 is a negative reflection of the decline of China’s growth rates on the world economy. The growth rates in China that is the second largest economy in the world declined to 6.8% as of the fourth quarter of 2015. This has led to a sharp reduction in commodity prices, particularly oil, through especially the decrease in demand channel. China is performing about 11% of the world’s foreign trade volume; the decline in demand is affecting China’s trade partners such as Asian and European countries and USA negatively.

The run of rapid economic growth in China after the 2008 crisis compared to other countries led investors to price the China Stock Exchange on the perception that the high growth rates would continue. However, the expectation that declining growth rates would reduce corporate profit sparked a wave of selling on the Chinese Stock Exchange from its high levels, especially from the second half of 2015. This led to substantial selling in global stock markets, as well as China. The Chinese government announced that it had adopted a growth model which would be supported by domestic consumption, rather than the export-oriented growth it had pursued, by increasing the share of the service sector in the economy in 2015 and began to implement its new policies in this direction.

35% drop in oil prices
With oil constituting the majority of budget revenues in many oil exporting countries, these countries tended to keep supplies high levels rather than reducing production when prices fell, and this, along with the slowing growth in China, paved the way for a 35% slump in oil prices during 2015.

Prices of commodity, particularly oil prices, are expected to remain low in 2016 given the continued downward trend in rates of growth in the world as well as the increased investments in alternative energy resources with the development of new technologies.

Because Turkey’s economic structure relies on the import of commodities, in contrast with many other developing countries which are commodity exporters, Turkey benefited from the plunge in prices of commodity, principally oil.

Outlook for the Turkish Economy
Because Turkey’s economic structure relies on the import of commodities, in contrast with many other developing countries which are commodity exporters, Turkey benefited from the plunge in prices of commodity, principally oil.

Turkey displayed a growth performance which exceeded expectations in 2015, despite the fall of the TL, geopolitical risks on our borders and inflation exceeding the target.

The Turkish economy is expected to post another sound growth performance in 2016. The Fed’s next steps in tightening monetary policy, that were to be implemented at the beginning of 2015, played a significant role in determining capital movements in developing countries. After the Fed completed its monetary easing and leaned towards raising interest rates, financing costs increased for countries burdened by current account deficits, thus raising the risk perception towards Turkey. However, some of the uncertainty was cleared up after the Fed hiked interest rates only once in 2015, by 25 basis points, while the consensus views that the Fed would be in no hurry to raise interest rates began to change the negative view regarding Turkish markets, as well as other emerging markets.

The weakening TL and slump in commodity prices throughout the year ensured that Turkey’s current account deficit narrowed. The current account deficit to GDP ratio fell below 5%, and a monthly current account surplus was achieved for the first time in six years. The majority of Turkey’s receipts are Euro based, given that EU countries form Turkey’s largest export market, whereas its expenses are generally denominated in USDs. While the depreciation of TL is expected to have a positive effect on Turkey’s exports, the impact of net exports on growth was negative as a result of weakening in the global economy and depreciation of the Euro against the USD. The low oil prices and the difficulties faced by the Russian economy due to EU sanctions, the failure to achieve the desired economic recovery in EU countries, geopolitical problems and the ongoing problems in Iraq, which is one of our main export markets, also due to low oil prices were the factors that affected our exports negatively. There was no contribution of net exports to growth in 2015; it was domestic demand which took growth to above expectations.

As a result of the high food prices in 2015 and a fall of around 20% in the value of the TL against the USD- Euro basket leading to an exchange rate impact, inflation ended the year above expectations.

The CBRT lowered the 1-week repo rate by 75 basis points, the upper band of the corridor by 50 basis points and the lower band by 25 basis points in the first quarter of 2015, and the CBRT was expected to continue interest rate cuts for the remainder of the year. However, the depreciation of the TL, the high level of inflation and challenges facing the global economy forced the CBRT to pursue a tighter monetary policy. The Central Bank announced that it would take steps to simplify the monetary policy in 2015, but specified reduced volatility in global economies and continued Fed interest rate hikes as a pre-condition.

Despite the high debt ratios seen in developed countries in the world, Turkey was able to keep its public debt low due to the fiscal discipline that it implemented. The same commitment is expected to continue also in 2016.

Although the sharp decline in commodity prices, particularly in oil, seen during 2015 reduced Turkey’s import bill, the outflow of funds from commodity-exporting developing countries negatively affected Turkey. Although the existing pressure on developing countries is expected to continue with the Fed’s announcement that it would continue with the normalization policy in 2016, the Fed’s pronouncements that it will only take gradually steps will limit this pressure. Further, the ECB’s expansionary monetary policy implementation may positively affect Turkey’s exports. On the other hand, steps taken towards structural reforms will contribute to sustainable growth by shaping Turkey’s macroeconomic structure in 2016 and beyond.