WHAT HAPPENED IN FEBRUARY?

It was a quiet month with politics, economy and markets moving in a narrow band until the last days of February, namely February 24th.

The Russia-Ukraine tension, which has been going on for a long time and has been underestimated by many, turned from a threat to a reality on the morning of February 24, with the Russian military forces entering Ukraine. We’ll watch and see what happens next. However, the entry of two very important trade partners of Turkey in tourism, energy and agriculture into war is an important economic risk for 2022. This risk will grow as the troubled process continues.

Let’s now take a look at the latest situation in economic indicators.

ECONOMY GROWS 11% IN 2021

Turkey grew by 9.1% in the fourth quarter of 2021 and annual growth was 11% throughout the year, according to the data announced by Turkish Statistical Institute (TurkStat). Thus, the economy, which managed to grow by 1.8% in 2020 despite the worldwide contraction, achieved a higher pace than the global economy in 2021.

The pace of the economy, which grew by 7.3%, 21.9% and 7.5% in the first three quarters, respectively, remained high in the last quarter as well. In this respect, Turkey displayed a strong outlook compared to major economies. The table below shows the last quarter growth rates of some countries.

It is noteworthy that the growth was strong, led by consumption, despite the jump in exchange rates and the historically low levels of consumer confidence, in the last three months of the year. While consumption expenditures grew by 21.4% in the last quarter, there was a 0.8% decline in investments and 1.9% in public expenditures.

While consumption increased by 15.1% in real terms throughout the year, investments grew by 6.1% and public expenditures by 2.1%. While exports grew by nearly 25%, the increase in imports was 2%.

When the construction and machinery investments analyzed separately throughout the year on the investment side, we see that the performance is quite low in construction and the investment appetite is higher in machinery. However, a weakening in machinery investments is also observed in the last quarter.

The industrial sector showed the best performance in growth throughout the year. The most important factor behind this dynamism of the sector, which completed 2021 with 16.6% growth, was exports. The rapid growth of Europe, the U.S. and other target markets supported their foreign demands, which in return supported Turkey’s exports to these markets.

Agriculture and construction sectors, on the other hand, did not have a heartwarming period in 2021. The agricultural sector, which grew by 2% in the first half of the year, contracted by 3.6% in the second half, closing the year with a 2.2% shrinkage.

2021 has been the most difficult period of recent years for the agricultural sector. The sector, which was shaken by the rising raw material prices and the jumping exchange rate, on top of the climate problems such as drought, flood and excessive precipitation, also suffered a great damage with the import permits that came on top of them. There were sharp de

creases in the harvest of many agricultural products in 2021.

In 2021, wheat production decreased by 13.9%, barley production by 30%, rye production by 32.4%, oat production by 12.2%, chickpea production by 24.6% and lentil production by 30.6%. The lowest production was experienced in wheat in the last 14 years, in barley in the last 32 years and in rye in the last 27 years. There were partial increases in sunflower, dry bean, corn, soybean, fruit and vegetable production.

On the other hand, after growing 3.5% in the first half of the year, construction contracted by around 5% in the second half. The sector closed the year with a shrinkage of close to 1%.

The 2021 performance of the main sectors is as follows:

SIGN OF DETERIORATION IN INCOME DISTRIBUTION

The share of wage earners in total income in each quarter of the year was below 2020 despite high growth in 2021. However, this share has not only decreased below 2020; it also fell to its lowest level since 2011.

There has been a deterioration in income distribution in Turkey in recent years. We follow this data with the results of the Income and Living Conditions Survey announced by TurkStat every year. The Gini coefficient, the number that demonstrates the degree of inequality in distribution of income, reached the highest level of the last 10 years with 0.41 in the last announced data in 2020. In other words, the income distribution had fallen to its weakest level in the last 10 years.

The decrease in the share of wage earners in total income in 2021 and the increase in uncertainty and volatility in the last three-to-four months of 2021 indicate that the income distribution may have deteriorated a little more.

CONSTRUCTION COSTS QUADRUPLED IN SIX YEARS

December results of the construction cost index were announced recently and the index exceeded 400 points for the first time. This shows that construction costs in December 2021 quadrupled compared to 2015, when TurkStat started to publish the data assuming that year as 100 points. This is a striking increase.

The steepest rise so far in the 2015-based index took place in 2021, as one can easily predict. Increases, which have so far not exceeded 25%, have jumped this year with a pace probably not seen in 20 years.

The issue I would like to draw your attention to is that the increase will continue in 2022. The index may exceed 500, especially in the first quarter of the year. This means that house prices will rise at almost the same rate.

LIFE SATISFACTION WEAKENS

TurkStat has been announcing the results of the previous year’s Life Satisfaction Survey in the first quarter of every year since 2003. Those who said they were generally happy in the previous year (in 2020) dropped to their lowest level with 48.2%. Those who say “I am unhappy” have reached the highest level since 2009 with 14.5%. The share of those who said “neither happy nor unhappy” reached its highest level with 37.3%.

The results of the 2021 survey is as follows:

• The rate of those who say they are happy is 49.3%.

• The rate of those who say they are unhappy is 16.6%..

• The rate of those who said they were neither happy nor unhappy was 34%..

Four points stand out in the research results;

►Firstly, although there is a slight increase in 2021, the rate of those who say they are happy has decreased since 2016.

►Second, the rate of those who say “I am happy” in 2020 and 2021 is below 50% for the first time since 2003.

►Third, there has been a significant increase in the rate of those who say they are unhappy in the last five years. The rate increased from 10.4% to 16.6%. The increase in 2021 alone is over 2 points.

►Fourth, the rate of those who say they are unhappy has reached the peak of the last 19 years.

When the level of happiness is analyzed by age groups, striking results stand out. There is a sharp increase in the level of unhappiness in the 18-24 and 25-34 age groups. I mentioned above that there was a deterioration in happiness/unhappiness trends after 2016. If we take that year as a base, the proportion of those aged 18-24 who said they were unhappy from 8.6% in 2016 to 20.4% in 2021. In the 25-34 age group, the rate of those who said they were unhappy increased from 9.3% to 17.1%. The rate of those who say “I am unhappy” is increasing in all age groups, but these two groups have the highest increase.

Another thing that makes this situation interesting is that while the age group with the highest happiness rate among all age groups was the young people between the ages of 18-24, it is now the age group where it is the lowest.

Despite all this negative course, the rate of those who say they are hopeful for the future is 60.7%. Although this rate is at its lowest level in the last 19 years, it is still a strong level of hope. However, it should be noted that there has been a 9 percentage point increase in the rate of those who are hopeless about the future in 2021, and the rate of those who respond in this direction has increased to 39.3%.

FDI IS BACK TO PRE-COVID LEVELS

Global foreign direct investments (FDI), which declined rapidly in 2020 due to the pandemic and fell below USD 1tr, started to rise again in 2021.

Global FDI, which fell sharply in 2020, when COVID -19 started, grew even faster in 2021. FDI is predicted to have reached USD 1.65tr with 77% increase and have returned to pre-pandemic levels, according to United Nations Conference on Trade and Development (UNCTAD) data.

This increase in FDI in general was mainly due to the change of ownership of existing investments and companies. Greenfield investments, on the other hand, did not change much compared to the previous year. Investments in developed countries tripled compared to 2020 and reached USD 777bn. Investments in developing countries, on the other hand, increased by 30% to USD 870bn.

Investments in the U.S. increased by 114% to USD 323bn. The EU has yet to return to pre-pandemic levels with investments only increasing by 8%. Investments in China, in the meantime, increased by 20% to USD 179bn.

Mergers and acquisitions (M&A) accounted for most of the direct investments, which has reached USD 1.65tr globally. The estimated value of cross-border M&A transactions in 2021 was USD 710bn. The leading sectors were listed as information-communication, pharmaceuticals, finance, trade, transportation and storage and automo

tive in these transactions, which increased by nearly 50% compared to the previous year.

The main reason for the strong increase in foreign direct investment in 2021 was that the worst of the pandemic was behind and economic growth and trade regained momentum after the vaccine. But there were three more factors supporting this process.

These were monetary and fiscal incentives given by states to strengthen and mobilize their economies, the rise in global commodity prices and the structural change in supply chains.

In 2020, there was a decrease of around 42% in investments on a global scale due to COVID-19. However, the decrease in investment inflows to Turkey was limited to 16%. FDI inflow to Turkey, which was USD 9.2bn in 2019, decreased to USD 7.9bn in 2020.

Since UNCTAD, which publishes foreign direct investment data around the world, has not yet announced country-based details for 2021, we do not exactly know what the situation was in Turkey last year. However, the direct investments we received in 2021 in the CBRT’s balance of payments data increased by almost USD 1.5bn compared to the previous year. The UK, U.S. and Germany were the top three investor countries in 2021. Trade and food were the sectors in which the most investments were made. Turkey’s investments in other countries, on the other hand, increased by more than 40% in 2021 and reached USD 4.6bn.

PMI DATA HOVERS AT BORDERS

The Turkish Purchasing Managers’ Index (PMI), which declined to its lowest value of the last eight months with 50.5 points in January, was 50.4 in February. Thus, the index, which had a weak start to 2022, started to move in in the direction of growth despite a minor decrease in February.

When examined on a sector basis, we see that only three out of ten sectors have a value of 50 and above.

These three sectors are chemical and plastics (with 54.1), clothing and leather (with 50.9), and land vehicles (with 50). The PMI in all other sectors contracted. While there was a contraction in six sectors last month, seven sectors contracted this month.

The chemical-plastics sector had the highest PMI in February. The uniquely positive trend for this sector is not exclusive to this month. The chemical-plastics industry has been growing in five of the last six months, unlike the other nine industries. Among the rest, only the clothing and leather sector had positive values in five of the last six months, but that sector is much

more volatile than the chemical and plastics sector.

When we look at sub-indices, we have been witnessing a steady increase in employment for a long time. Employment growth continued in February in eight sectors, excluding textiles and non-metallic mineral production.

In January, the new orders sub-index contracted for eight sectors. This situation did not change in February. Again, the new orders index is above 50 only in the clothing-leather and chemical-plastic sectors. However, the new order values for the remaining seven sectors were higher than the previous month. Values in the clothing-leather, basic metal, and electrical-electronics sectors are slightly below last month.

The factor that was attention-grabbing in February and pushed the new orders index up was a strengthening in export orders. Export orders in seven of 10 sectors showed growth with a value above 50. Export orders are below 50 in the textile, non-metallic minerals, and machinery sectors. In addition, the February value in textiles and non-metallic minerals was also below January. Another remarkable development among the sub-indices is the increase in the production index of only one sector (clothing-leather) and the decrease in production for the others. As a result, the fact that the PMI for February was above 50 was mostly due to the positive performance of the chemicals and plastics industry and the recovery in new orders due to the increase in export orders.

WEAK OUTLOOK IN CONFIDENCE INDICES

In January, consumer confidence increased by more than four points due to the falling tension in the foreign exchange rates, the start of a new year, and possible wage hikes. February data decreased by two points compared to the previous month.

We saw a weakening in all four sub-indices that make up the consumer confidence index. The most severe decline was in the “household financial situation expectation in the next 12 months” sub-index with a 4.2% decrease. The sub-index fell to its historical low in the same period was “Probability of buying durable consumer goods in the next 12 months.”

This sub-index has fluctuated much less than the other three over the past decade and usually lands at a value between 95-100. However, it started to fluctuate more sharply in recent months and fell to 89.4 for the first time. This is a critical warning sign in terms of domestic demand and may indicate a decline in sales in many sectors such as furniture and white goods. Although there has been no new deterioration in the exchange rates in the last two months, the decline in the probability of purchasing durable goods seems to be a reflection of the rise in the prices of goods and services and income levels that do not comply with this.

On the production side, we have confidence indices for the real sector, services, retail, and construction sectors at hand. Let’s combine them all and call it the producer confidence index. The outlook of the index and its relationship with consumer confidence is shown in the graph below.

As seen on the graph, producer and consumer confidence have diverged since the spring of 2021. We can relate the increase in producer confidence to the increase in real sector confidence due to export performance. But this would be an incomplete assessment. There has also been a recovery on the services and retail side. Contrary movements in producer and consumer confidence on monthly basis can also be observed. However, the fact

that the two indices have moved in opposite directions for a long time may cause a problem in terms of long-term balances in the economy and this cannot continue for a long time. It seems that the upward trend in producer confidence has started to reverse and the downward movement in consumer confidence is on a horizontal course.

CPI HITS 20 YEAR’S PEAK, PPI AT 27-YEAR TOP

January inflation, which was announced at the beginning of February, jumped to 48.7% in consumer prices and 93.5% in producer prices. Thus, we have reached a level that we have not seen since January 2002 in consumer inflation.

The consumer price index (CPI) is 54.4% and the producer price index (PPI) is 105.1%, according to February data released last week. Currently, the CPI is at its highest level since March 2002 and PPI is at its highest value since March 1995.

There are multiple factors behind these historical peaks in inflation. The most important thing is the policy rate, which is negative in real terms. The interest rate cutting cycle that started last September has boosted domestic demand for foreign exchange as it has caused negative real yields. This caused the costs of all goods and services to rise rapidly in TL terms. On the other hand, the increase in global commodity prices also contributed to this process. However, price increases in Turkey reached eight to nine times higher levels than in other countries due to the depreciation of TL.

The gap between CPI and PPI broke a new record, exceeding 50 points. This means that we will have to wait longer for the targeted decline in CPI. The pressure of the Russia-Ukraine tension, which has escalated in recent weeks, on commodity prices has also intensified. Historical peaks were exceeded in the prices of many products. Therefore, the upward inflation movement will increase even further in the near term.

THE UNBEARABLE RISE OF IMPORTS

Exports increased by 17.1% and imports by 55%, according to January foreign trade data. The increase was 25.4% in exports and 45.6% in imports in the February data announced last week. Imports rose faster than exports in the last three months. The annualized foreign trade deficit, exceeding USD 58bn, reached its highest level since 2018.

We see a sharper climb in imports despite the increase in exports. This is due to the continued increase in demand despite the sharp depreciation in the TL, which has been driving the prices of many products up rapidly. The increase in domestic demand and exports and commodity prices, on the other hand, resulted in a rise in imports.

One of the most important reasons for the deterioration in the foreign trade balance is the increase in commodity prices. In particular, the extreme rise in natural gas and oil prices brought Turkey’s energy imports to historical levels. Turkey’s energy imports, which were USD 5.4bn in the first two months of 2021, were three times higher in the same period of this year. Energy constitutes almost one-third of imports in 2022 so far.

We will feel the effects of the recent price increases in other commodities on imports more deeply in March. Our import bill will continue to rise as long as the Russia-Ukraine tension continues.

We will see another result of this in the current account balance. The year-round surplus target will likely not be achieved. Moreover, the probability of a current account deficit higher than last year is increasing.