OECD Chief Economist is optimistic about Turkish Economy

By News Centre

Clare Lombardelli, Chief Economist of the Organization for Economic Development and Cooperation (OECD), made a statement to the AA correspondent regarding the Economic Outlook Report published by the OECD today and the developments in Turkiye and the world economy.

Stating that the changes made in the monetary and fiscal policy in Turkiye in the last year or so are satisfactory, Lombardelli said, "Tight monetary and fiscal policy is the step that the economy needs most in the face of a major problem such as inflation. Inflation is still high in Turkiye, but we expect it to decrease. Currently, the policy rate in Turkiye is 50 percent, and we anticipate that this level will need to be maintained for the rest of the year and possibly until the second quarter of 2025. After that, we may see easing, but this largely depends on the course of inflation.”

Lombardelli noted that the Turkish economy grew by 4.5 percent in 2023 and said that they expect growth of 3.4 percent this year and 3.2 percent in 2025.

Saying that there will be some slowdown in the economy due to tightening steps in this context, Lombardelli made the following evaluations:

"There is a significant amount of investment due to the need for reconstruction in the earthquake zone. It is clear that this increases demand. In addition, as the global economy revives, we expect Turkiye's exports to increase. Therefore, we have reasons to be optimistic about the Turkish economy, but we believe that a tight policy stance will be needed to reduce inflation. We do not expect any relaxation in the policy. Since we think the current 50 percent level of policy interest is reasonable, we anticipate that the policy will remain tight at least until next year."

Lombardelli pointed out that it takes time for the tightening steps in monetary and fiscal policy to be reflected in the economy and stated that it will take time for inflation to decrease in Turkiye.

Noting that there may be some loosening in monetary policy if inflation falls, Lombardelli added that, in the foreseeable future, it is important to maintain this tight monetary stance and monitor whether additional tightening is required.

Stating that inflation decreased faster than expected due to the increase in policy rates of central banks around the world, Lombardelli said that geopolitical risks may still pose risks regarding inflation.

Lombardelli, however, informed that they increased their growth forecast for this year in the global economy to 3.1 percent.

Stating that consumer demand is strong in some countries and labour markets are performing better than expected, Lombardelli said, "We have increased our growth forecasts in some countries, especially the USA and India."

Lombardelli stated that they foresee a growth of 2.6 percent this year and 1.8 percent in 2025 in the US economy, which grew by 2.5 percent last year, and that the rate in the Indian economy, which grew by 7.8 percent in 2023, will be 6 percent this year and in 2025. She explained that they expected it to be 6.

Underlining that the Eurozone will have a very difficult year in 2023, Lombardelli said, "Many economies in the Eurozone, including Germany, have entered a recession. When we look ahead, of course, there are risks, but we do not foresee a recession in any European economy. This year, the Eurozone We calculate that the growth will be 0.7 percent in 2025. When we consider last year's growth and our forecast for 2024, there is a big difference between the European countries and the US economy. We will see this difference narrowing slightly in 2025 to 1.5 percent for the Eurozone and the US economy. We expect 1.8 percent growth for the economy."

Explaining the expectations of central banks regarding interest rate cuts, Lombardelli stated that interest rate cuts have been seen in some developing economies, but they predict that central banks in developed economies will start cutting interest rates after the second half of this year.

Lombardelli underscored that the timing of interest rate cuts will vary depending on the countries' own conditions and continued as follows:

"We think that the interest rate cut in Europe will start earlier than in the USA, which reflects the relative strength of the economies in question. We expect the interest rate cut in Europe to start in the third quarter of the year, but depending on future data, this may be pushed a little earlier. In the third and last quarter of the year, there may be two interest rate cuts, but we may also see faster action from the European Central Bank. We expect the US Federal Reserve (Fed) to cut interest rates in the third quarter or later. We also expect two interest rate cuts from the Fed in the third quarter. However, all these developments depend on future inflation data.

If inflation does not fall as expected in most countries, then these interest rate cuts may need to be postponed slightly. Service sector inflation, which is especially upward in some countries, is important at this point. The US position in terms of interest rate cuts will be important for many countries due to its impact on the dollar exchange rate. In this context, we may see further divergence among economies towards loosening monetary policy."

Stating that they expect the opposite policy in Japan, Lombardelli said, "We expect a very slow increase in interest rates in Japan. This increase may continue in the second half of this year and 2025."

Lombardelli pointed out that China's position is different compared to other countries and the weaknesses in the Chinese economy. Noting that they expect solid growth in the Chinese economy this year, Lombardelli said, "However, we estimate that growth will slow down, and therefore we may see a different approach in monetary policy."

According to the OECD Economic Outlook Report, the world economy grew by 3.1 percent last year. Growth was 3.4 and 1.7 percent in G20 and OECD countries, respectively.

While the global economy is expected to grow by 3.1 percent this year, this rate is expected to reach 3.2 percent in 2025. Growth is estimated to be 3.1 percent in G20 countries and 1.7 percent in the OECD this year.

The Chinese economy, which grew 5.2 percent last year, is expected to grow 4.9 percent this year and 4.5 percent in 2025.

While growth in the US economy will be 2.5 percent in 2023, this rate is expected to be 2.6 percent and 1.8 percent in this year and 2025, respectively.

In the Eurozone, it is estimated that the 0.5 percent growth in 2023 will increase to 0.7 percent this year and 1.5 percent in 2025.

In the Turkish economy, which grew by 4.5 percent last year, this rate is calculated to be 3.4 percent this year and 3.2 percent next year.

According to the OECD, economic growth is expected to be 0.2 percent this year in Germany, 0.4 percent in the United Kingdom, 2.6 percent in Russia, and 1.9 percent in Brazil.