In 2018, we expect that growth in Turkey’s economy will be relatively stable between exports and domestic demand. We also predict that there will be limited positive contribution to growth of net foreign demand. Key determinants of net foreign demand will be growth in the EU economy, a rise in the price of oil and other raw materials, and regional geopolitical risks.

We foresee that a rise in the exchange rate will cause the inflation rate to increase and continue to negatively affect consumer confidence. Also, the tax increase may limit consumption. For these reasons, we expect the increase in private consumption to be limited. We also expect that investments will continue to weaken due to growing political uncertainty, security problems, and the pressure of global conditions on financing costs. We assume that public expenditures will occur as determined by the Middle Term Program, thus the contribution to growth from public spending will be limited.

The continuation of the positive effects of the quantitative easing in the EU economy, Brexit negotiations that limits damage to the EU and UK economies, and the mitigation of geopolitical risks could increase net foreign demand in support of growth. One of the assumptions of this scenario is that there will be no sudden slowdown in developing economies.

The acceleration of implementing structural reforms in the economy, especially taking steps to reduce the burden on the workforce, reforms in education, tax reform, and regulations to improve the investment climate, will increase economic growth as well as potential for growth in the long-run. The expansion of the Credit Guarantee Fund may also increase growth. In this case, the growth rate could be approximately 1 percentage point higher.

Also, contribution of net external demand to growth could be 1 percentage point less due to intensifying geopolitical risks, tighter than expected monetary policy by the Federal Reserve, and the weaker domestic demand in the EU. The forecast band of the 2018 annual GDP growth of 4.5 per cent is predicted to be +/- 1 point.

Additionally, problems stemming from a sudden slowdown in developing economies or high indebtedness in global financial markets, might have negative consequences far greater than the above stated forecast bands. The new U.S. Administration’s focus on protectionist policies and risk of trade wars could cause a global economic slowdown. The economy will likely face growing costs in the financing of growth. The increase in the current account deficit due to higher energy prices, could decrease somewhat due to a slowdown in the economy.

In any case, the important contribution of the structural reform-growth relationship to potential growth depends on the healthy implementation of the reform program. The work of TÜSİAD Economic Research shows that if the structural reforms are implemented with correct prioritization, medium-term growth can rise by 1.0-2.0 points towards supply side.

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Source: TUSIAD
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