Turkey

Turkey holds strategic position and serves as the bridge between Asia and Europe. The country’s $800bn economy remains among the 20 biggest in the world according to the IMF while the World Bank has ranked it as the 18th largest economy in the world. Turkey’s economy has grown on average by 6pc annually since 2010.

However, high inflation, a large external deficit, and reliance on external financing pose vulnerabilities and could put pressures on the economy. The government is planning to increase Turkey’s GDP to $1.3trn by 2018 from $800bn in 2013. But economic growth slowed to just above 2pc in 2013 and has lost momentum in 2014 due to serious regional geopolitical tensions and the sluggish recovery in Europe. The trend is likely to continue.

The government has slashed its growth estimates and raised its inflation forecast for 2014 and 2015. Turkey’s economy is now forecast to grow by 3.3pc in 2014 and to 4pc in 2015. The current account deficit is set to stay above 5pc of GDP.

Mainly driven by a strong export performance, Turkey has grown by 4.7pc in first-quarter of 2014 but the growth rate in the second-quarter receded to a mere 2.1pc. The economy grew less than expected in the second quarter because of weak domestic demand. On a calendar and seasonally-adjusted basis, the economy contracted by 0.5pc in the April through June period, compared with the first three months of the year, indicating the first contraction since the first quarter of 2012. The slowdown in economic activity was the result of the central bank’s monetary tightening, the slowing EU economy hurting exports, and geopolitical tensions.

The OECD has cut Turkey’s growth forecast to 3.2pc in 2015 and 4pc in 2016. It expects 3.5pc growth in 2014.

Fighting inflation will continue to be a key priority of Turkey’s economic plan in 2015 to 2017, along with boosting growth and reducing the current account deficit. Year-end inflation is expected to reach 9.4pc, well above the central bank’s forecast of 5.3pc. Inflation is likely to fall in 2015 to 6.3pc and further to 5.3pc in 2016. Turkey’s central bank Governor Erdem Basci has stated that inflation will be higher than previously forecast this year and in 2015. He expects inflation to be around 8.9pc in 2014 and 6.1pc in 2015. The new projections were lower than the government inflation forecasts.

Unemployment is rapidly escalating. The unemployment rate was 9.9pc in June 2014. The government aims to lower the unemployment rate to 7pc by 2017. High inflation coupled with the country’s low employment rate has led to high levels of poverty.

According to an OECD study, one in three Turks is not able to afford sufficient food. The OECD average is one in seven. Furthermore, 20pc of Turks live below the relative poverty line, surviving on less-than-half of the Turkish median income. This makes Turkey the third ‘poorest’ developed nation, with Mexico and Israel lagging behind.

Structural reforms, third on the priority list, are designed to boost productivity in the business sector and achieve balanced growth. The wide-ranging structural reforms are aimed at reducing dependence on imports by 2018, which at the moment is almost $100bn more than the country’s exports.

Exports are targeted to finance imports upto 70pc until 2018 and to reduce the current account deficit from 7.9pc to 5.2pc. Narrowing Turkey’s current account deficit is the second priority of the new medium-term economic programme 2015-17. It stood at 7.8pc of GDP in 2013.

Focus Economics Consensus Forecast panelists expect the current account deficit to reach 5.9pc of GDP this year. For 2015, the panel sees the current account deficit remaining broadly stable at 5.7pc of GDP. The government is aiming to reduce the deficit to 5.2pc of GDP by 2017.

Spain

Spain, the Eurozone’s fourth-biggest economy, was one of the worst hit by the Eurozone crisis, but it began to turn round by the end of 2013, and the country saw stronger than expected growth the following year, with unemployment falling back to 24.5pc from a peak of 27.2pc.

The Spanish economy is now outperforming some of its bigger Eurozone peers. Financial conditions have sharply improved and domestic demand is taking over the growth baton. However, bank lending is still contracting and unemployment remains extremely high. Spain enjoyed a relatively low debt ratio, equal to 36.3pc of GDP, before the start of the global financial crisis. The ratio continues to increase and is expected to reach 99.8pc in 2014. The debt ratio will climb to 100.3pc of GDP in 2015 and 101.5pc in 2016 before dropping to 98.5pc in 2017.

Bouncing back after six years of crisis that brought it close to financial collapse, Spain emerged from the latest two-year downturn in mid-2013. In 2014, the economy rose 0.4pc on a quarterly basis in the first-quarter and grew faster-than-expected in the second-quarter at 0.6pc. Initial estimates suggest that the economy grew by 0.5pc in the third-quarter, showing its fifth consecutive quarter of growth but slightly slower than the growth achieved in the previous three months. It took Spain’s annual growth rate to the highest level in more than six years at 1.6pc, up from 1.3pc in the second-quarter.

Spain’s Economy Minister Luis de Guindos expects economic growth in the fourth-quarter at 5pc and 1.3pc in 2014, against a 1.2pc contraction last year.

The IMF also forecasts 1.3pc growth for 2014 but 1.7pc growth for 2015, its highest projections for any advanced European economy. As a result of the recession in Italy, stagnation in France, sluggishness in Germany, the European Commission has reduced its 2015 growth forecast for Spain to 1.7pc, down from 2.1pc that the Commission predicted earlier.

According to a Arcano study, the growth could well be above the 2pc predicted by the government, and real estate and construction will be the ‘engines of economic growth’ in Spain for 2015.

Published in Dawn, Economic & Business, December 8th , 2014