THE EFFECTS OF THE COVID-19 VIRUS ON THE GLOBAL ECONOMY, THE VACCINATION ROLLOUT, EXPANSIONARY MONETARY POLICIES UNDERTAKEN BY CENTRAL BANKS AND GOVERNMENTS’ INCENTIVE PACKAGES PLAYED AN IMPORTANT ROLE IN SHAPING THE GLOBAL ECONOMY IN 2021.

The World Economy

The effects of the Covid-19 pandemic on the global economy, the vaccination rollout, the expansionary monetary policies pursued by central banks and the incentive packages offered by governments played an important role in shaping the global economy in 2021.

Despite a rise in the number of cases with the spread of the Omicron variant, following on from the delta variant, the negative effects of the pandemic eased during the year. The recovery in the global economy continued, with economies posting substantial economic on the back of the base effect. Due to rising commodity prices with the increase in demand, problems experienced in the supply chain and supply bottlenecks, inflation edged up to the highest levels seen in recent years.

Against this backdrop, the central banks of developed countries started to signal that they would end their expansionary monetary policy and begin to implement a tightening monetary policy in the coming period. While the current high levels inflation all over the world are expected to prove a temporary phenomenon, inflation rates remain stubbornly high compared to the averages of previous years, continuing to stoke worries over the current course of inflation.

The US economy, which had been hit hard by the pandemic in 2020, continued to recover in 2021, with a significant rebound in growth.

The US Federal Reserve (FED) left its policy rate on hold last year, stating that the supply and demand imbalances caused by the reopening of the economy had led to high inflation. In this context, the FED decided to wind down its bond purchase program in March 2022, having implemented the program in a bid to ease the negative effects of the pandemic on the economy. It also signaled that it will implement a tightening in monetary policy by increasing interest rates in the next year. Rates of unemployment in the US maintained their downward trend since the beginning of the year on the back of recovery in the economy. However, rates of unemployment still remain above their pre-pandemic levels. All eyes will now be on the monetary policy to be implemented by the FED in the coming period, and how it will affect the global economy.

The European economy, which had also been adversely affected by the Covid-19 pandemic, staged a partial recovery in the third quarter of the year in parallel with the recovery in the global economy. However, this was followed by a slowdown in growth in the final quarter of the year, triggered by the spread of the Omicron variant. While employment and income losses continued to be seen throughout the year, many service sectors recorded a slowdown, especially tourism. Despite some variations in employment and inflation, the European Central Bank (ECB) maintained its supportive monetary policy.

However, the ECB stated that Pandemic Emergency Purchase Program (PEPP) would be calibrated to a slower pace than in the previous quarter due to the high course of inflation. It stated that net asset purchases within the framework of the PEPP would be wound down in March. Despite some positive movement in the Euro Zone’s PMI data, on the other hand, a slight decrease was observed in the industrial production. In conclusion, although the macroeconomic indicators are still negative when compared to the pre-pandemic period, expectations for the future remain optimistic.

The Covid-19 pandemic continued to impact the economies of developing countries in 2021. The rapid rise in commodity prices has had a catalytic effect on the growth figures of commodity exporters. However, especially after the second half of the year, the high course in commodity prices and the continuation of supply issues sparked a rise in inflation in the economies of developing countries. The surge in energy prices has also had a significant impact on the increase in producer prices.

Central banks of developing countries increased their interest rates, and thus, they tried to balance the rate of increase of inflation. Developing countries will closely monitor the monetary policies to be implemented by the Central banks of developed countries throughout the coming year.

RISING COSTS ACROSS THE GLOBE LED TO DETERIORATION IN INFLATION EXPECTATIONS AND PRICING BEHAVIOR IN THE LAST QUARTER OF 2021.

The Turkish Economy

The Covid-19 virus, with spread in 2020, continued to affect our country socially and economically this year. However, the success of the Ministry of Health and Turkish government in managing the pandemic ensured that the pandemic was brought under control in a short time. The process of normalization in social life continued with the measures taken and economic activity swiftly returned to its pre-pandemic levels.

Supported by the acceleration in the vaccination rollout, expectations regarding the Turkish economy remained upbeat. Positive expectations regarding the Turkish economy started to take hold in the financial markets. Despite a rise in energy prices and prices of manufacturing industry inputs, industrial production posted a significant increase on the back of stronger demand in the last quarter of the year. Employment figures sustained the improvement seen from the beginning of the year.

In the last quarter of the year, rising costs across the globe gave rise to a worsening in inflation expectations and pricing behavior. However, the institutions managing our economy followed a comprehensive policy process in order to keep the risks and expectations regarding inflation under control, and to support the Turkish Lira. Moreover, with the newly issued deposit products, necessary measures were taken to address the effects of the developments occurring in the exchange rate on inflation.

Economic growth is expected to continue in the coming period, with the recent rise in inflation expected to subside again. In addition, the process of improvement in the current account balance is set to continue thanks to the competitive TL exchange rate, paving the way for the generation of a current account surplus in 2022.