THE OUTLOOK OF THE WORLD ECONOMY

THE OUTLOOK OF THE WORLD ECONOMY

We observe that there is an overall adverse weather. During the last months, the increasing geopolitical risks have definitely an effect on it. The world economy may enter into a long-term slow growth period and one can predict the new normal growth as to be an inadequate one. If people expect that the future growth potential is going to be slow, then they will reduce today on investment and consumption. This situation may seriously impede the developed countries that are struggling with high unemployment and low inflation.

U.S. and European economies:

U.S. economy seems to be the most favorable in the global economy and has been the driving force of the global economic recovery. The evidence of this can be found in the incoming data. In the U.S. employment date announced on October 3, the unemployment rate has hit the lowest level in the last six years with 5.9%. Also, by growing 4.6% in the 2^nd quarter, the U.S. economy has reached the highest growth rate since 2006. Things seems to go well in the U.S. but because this positive trend will accelerate the Federal Reserve’s (Fed) move to raise the interest rates, this poses a vital risk especially for the emerging economies.

In contrast to the U.S.A., things are not good in the European economy. The 0% growth in September has confirmed it. Germany continued to grow, albeit small, while France and Italy’s economies shrank. It is also clear that the Ukraine crisis which affected the relations with Russia has a share in the economic downturn. European Central Bank President Draghi prepares to push the button of the program for an expansion similar to that of the USA (ABS) but it is important to note that it carries dangers for its sustainability and long-term risks.

Asian economies:

China's economy is showing signs of a slowdown on all fronts. While the economy is expected to grow around 7.4% in 2014, growth is expected to be around 7% in 2015. All figures below the level of 7% growth for China and the world economy means red alert. The growth in China is realized through export and savings. In order to compensate for that, China wants to stimulate the domestic demand, in other words, she wants to direct the citizens to consumption. The other main actor of the Asian economies, Japan, has shrank by 7.1% on annual basis by realizing the toughest shrink since 2009 by shrinking in the 2^nd quarter of the year. Although a growth of 4% is anticipated in the 3^rd quarter, the general economic outlook is not good.

Emerging markets:

The emerging countries which provided some breadth to the markets during the economic slowness period, may experience serious problems when the U.S. economy’s recovery becomes apparent. With the end of the quantitative easing and the increase in the interest rates, the experiencing of fluctuations in the capital inflow towards the emerging economies will be inevitable.

The countries called the Fragile Quintet and which is composed of Brazil, India, Indonesia, Turkey and South Africa who have a current account deficit, high inflation and a slowing growth are regarded as certain to lose speed in this process. According to the latest analysis of Financial Times, India was able to reduce its current account deficit by reducing its import of gold and by raising its interest rates. Indonesia also showed significant improvement in this direction.

But Brazil, Turkey and South Africa were not able to reduce the current account deficit despite raising the interest rates and falling growth rates. While in the Medium Term Plan, Turkey’s current account deficit which was projected to be 6.1% in 2014 will decline to 5.7% by the end of the year and the expectation for 2015 and 2016 have been reduced to 5.4%. If the growth performance is realized as 5% as claimed, this current account deficit may be a little more sustainable but if the growth of 2015 and 2016 is in the band of 2-4% but the current account deficit will continue to pose big risks.

In brief, the dangerous dependence on foreign sources continues at full speed. Also the Fragile Quintet and other developing countries’ currencies suffered a significant loss of value since September. Countries with strong export capacity can benefit from this situation, but due to Turkey's geopolitical position as well as its export quality, it cannot be said of her to be advantageous here. In this process, the investors who are financing the short-term financial needs of these countries may be expected to move to other countries such as the Philippines, Malaysia and South Korea when difficulties arise.