Global Recession is Coming, What Can Turkey Do?

The Danger of Recession in Europe

As is well known, markets around the world are shaped by the US economy and the Fed's monetary policies. The US economy, which accounts for 22% of the world's Gross Domestic Product (GDP), is currently on recession alert. Shrinking in the first two quarters of 2022 in a row, the American economy raises concerns of the Biden administration in the context of growth. Prices of food and petroleum products, as well as basic necessities, are rising at the fastest pace since 1981. Meanwhile, the Fed, which wants to take advantage of the chance to differentiate positively from the global economy, is taking decisions to raise the policy rate in a controlled manner without overcooling the economy and to ensure positive growth in the economy with relatively high inflation (9-10 percent).

On the other hand, the risk of contraction and recession is increasing in the German economy, the locomotive of Europe. EU countries, which have decided to reduce their use of natural gas by 15% as a remedy for the decline in natural gas deliveries from Russia, are expected to stall economic growth from the third quarter due to the energy bottleneck. High inflation in the Eurozone, which has reached 9-9.5% due to the negative effects of global warming, is further increasing the production costs of the natural gas-dependent industrial sector. The debt problem of member states is also a concern across the EU. As a result of all this, an average contraction of 5-6% in the EU economy later this year and in 2023 and a slowdown in production are seen as inevitable. A similar situation in the economy is also in question for the UK, which is leaving the EU.

Unlike Europe, which is trying to stabilize the economy with interest rate policies, China prefers to cut interest rates in order to revive its economy whose growth rate is slowing down. Despite this, it is rumored that the slowdown in the Chinese economy has already begun. This situation is expected to hit South American and African countries that export precious metals to China, and may eventually trigger a global recession, including the US.

Will Turkey Enter Recession?

In this context, production is declining and economies are shrinking all over the world. In the global manufacturing sector, production and employment are stagnating while new orders are declining. Therefore, the significant weakening and pressure on a global scale indicates that the third quarter of this year will be challenging for companies in the Turkish industrial sector. 

Expectations of recession in the EU, Turkey's main market, will have a negative impact on investment, production and employment in Turkey. In the domestic market, rising inflationary pressure and the negative impact of falling purchasing power may trigger a downward movement in prices. Such a move, which may be seen as positive for households, will cause our producers to face a two-way problem in domestic and foreign trade. Considering the very high cost and interest inputs, in this environment, it will not be possible for our industrial firms to make new investments, increase capacity and engage in employment-creating activities.

The depth of the recession in the EU starting from the fourth quarter, if not the third quarter of this year, will have a serious impact on our economy in the coming winter months. Throughout 2022, exports and GDP increased due to the excessive depreciation of the Turkish lira, but unfortunately, the increase in exports is not sustainable in the near term due to the global contraction. The rise in world energy and commodity prices not only robs Turkish industrialists of their capacity to produce at competitive prices, but also causes our import bill to swell even further.

Turkey, which already has to borrow in foreign currency at high cost and therefore its economy is technically extremely fragile, has a high inflation rate but a high growth rate. Therefore, as long as the unemployment rate does not rise further, it can be argued that even if there is a short-lived recession in the economy, "the crisis will be tangential to the Turkish economy".

In the near term, Turkey's input costs for natural gas, goods, services and labor in industrial production will remain relatively low compared to EU countries. Likewise, the Turkish lira will continue to depreciate against the dollar, making competitive pricing for exports more likely. 

What can Turkey do?

Implement a sharp export-oriented strategy orchestrated by the government,

Encouraging European companies, which are struggling to produce in their home countries due to energy constraints and rising costs, to rapidly relocate some of their low-investment production mechanisms to Turkey,

It should be aimed to provide the financing input needed by Turkish industrial companies for new investments from European banks through European companies at low cost and to overcome the possible obstacles to EU companies making joint investments with Turkish companies with practical solutions and a race against time approach.