THE EFFECTS OF THE COVID‑19 VIRUS ON THE GLOBAL ECONOMY, THE VACCINE DEVELOPMENT PROCESS, THE EXPANSIONARY MONETARY POLICIES OF CENTRAL BANKS AND THE INCENTIVE PACKAGES OF GOVERNMENTS PLAYED AN IMPORTANT ROLE IN SHAPING THE GLOBAL ECONOMY IN 2020.

WORLD ECONOMY

The effects of the Covid‑19 virus on the global economy, the vaccine development process, the expansionary monetary policies of central banks and the incentive packages of governments played an important role in shaping the global economy in 2020.

While the pandemic has caused a serious contraction in the global economy, progress in vaccine development offers promise for the future. Central banks of developed economies announced bond purchase programs in large amount, while interest rates fell sharply.

Commodity prices, which fell rapidly due to the pandemic, underwent a rapid increase in prices due to the release of pent‑up demand in the second half of the year. In the last quarter of the year, with the reintroduction of lockdown restrictions, consumption and expenditures decreased to some extent. However, the positive results in the development of a coronavirus vaccine have kept risk appetite alive in the forward looking financial markets.

The U.S. economy contracted by more than 30% in the second quarter of the year. In the third quarter of the year, it overcame this contraction, recording record growth of 33.4%. The U.S. Federal Reserve (Fed) continued to take expansionary steps in monetary and fiscal policies to mitigate the negative effects of the pandemic on the economy and to support growth. The U.S. administration also agreed on an additional stimulus package to mitigate the pandemic’s impact on the economy, as well as a financial package that includes large amounts of public funding and tax exemptions. The U.S. unemployment rate, which reached double digits during the pandemic, resumed a downward trend in the second half of the year. However, it still remains well above the pre‑pandemic levels. While the Fed has left its policy rate unchanged of late, long‑term interest rates remain low and market expectations indicate that the environment of low interest rates will continue for some time to come.

THE SUCCESS OF THE TURKISH HEALTH AUTHORITIES AND THE TURKISH GOVERNMENT IN PANDEMIC MANAGEMENT ALLOWED THE PANDEMIC TO BE BROUGHT UNDER CONTROL RAPIDLY. WITH THE MEASURES TAKEN, SOCIAL LIFE RETURNED TO NORMAL AND ECONOMIC ACTIVITY QUICKLY RETURNED TO ITS PRE‑PANDEMIC LEVELS.

The European economy was hit especially hard by the Covid‑19 pandemic. While employment and revenue losses were observed during the year, there were serious contractions in many service sectors, especially in tourism. Tightening restrictions due to the pandemic piled pressure on foreign demand and exports. While monetary and fiscal expansion continued in the Euro Zone, no changes were made in interest rates.

The President of the European Central Bank (ECB), Christine Lagarde, stated that the ECB could expand the Emergency Bond Purchase Program in order to mitigate the negative effects of the restrictions imposed on the economy due to the pandemic. The size of the program was increased by EUR 500 billion and its duration was extended until March 2022. The European economy, which contracted in the second quarter of the year, recorded significant growth in the third quarter of the year and started to recover again. The Eurozone PMI data points to a recovery while there have been signs of recovery in industrial production figures. As a result, although macroeconomic figures remain negative when compared to their pre‑pandemic levels, optimism about the future continues.

The Covid‑19 pandemic has also adversely affected the economies of developing countries. In particular, the decline in commodity prices has taken its toll on economies of commodity exporters. However, the recovery trend observed in the global economy in the second half of the year brought with it an increase in commodity prices. In addition, the continuation of serious supply cuts in oil production was another factor supporting the recovery in oil prices.

The expansionary monetary policy approaches taken by developed countries and their tendency to keep policy rates low have also paved the way for a shift in capital flows towards developing countries.

AS IN ALL WORLD ECONOMIES, THE TURKISH ECONOMY CONTRACTED IN THE SECOND QUARTER OF THE YEAR. HOWEVER, IT RECOVERED VERY QUICKLY WITH THE EFFECT OF THE INCREASE IN DEMAND.

THE TURKISH ECONOMY

The first case of Covid‑19 in Turkey was declared in the first quarter of the year and there was an increase in the number of cases in the second quarter. However, the success of the Turkish health authorities and the Turkish government in pandemic management allowed the pandemic to be brought under control rapidly. With the measures taken, social life returned to normal and economic activity quickly returned to its pre‑pandemic levels. With the contribution of vaccine rollout in the coming period, expectations for the Turkish economy are optimistic with positive expectations being priced in by the financial markets. While the recent normalization steps in monetary policy and CBRT’s tight monetary policy implementation in the last quarter of the year paved the way for a recovery in the value of the TL, the country risk premium decreased significantly.

As in all world economies, the Turkish economy contracted in the second quarter of the year. However, it recovered very quickly with the effect of the increase in demand. Contrary to the economies of most countries in the world, Turkey is expected to end the year with positive growth figures. During the year, social spending and cash support was provided to mitigate the negative effects of the pandemic on low‑income households and certain sectors. In addition, by using various fiscal policies, work was conducted to stimulate demand at reasonable levels in sectors experiencing contraction. A slight increase was observed in the current account deficit due to the high loan growth provided to support domestic demand during the pandemic period.

Increasing global commodity prices and costs in the second half of the year negatively affected inflation expectations and pricing behavior. However, the institutions managing our economy decided in favor of a strong monetary tightening in order to keep a tight grip on expectations regarding inflation.

In addition, the Monetary Policy Committee assessed that the permanent establishment of an inflation environment would positively affect macroeconomic and financial stability by decreasing country risk premiums, the onset of reverse currency substitution, an upward trend in foreign exchange reserves and a permanent decline in financing costs.

The tightening of monetary policy in the coming period is expected to bring about a permanent decline in inflation and the establishment of price stability. Despite some deterioration in the fiscal balance due to the programs announced and the public spending to mitigate the effects of the pandemic, economic activity has approached its pre‑pandemic period. Thanks to the planned and organized measures taken by the Turkish health authorities and incentives provided by the government, Turkey has achieved success in tackling the pandemic compared to other countries. The city hospitals built and investments undertaken in the health sector in recent years have been among the key factors behind this success.