POSSIBLE EFFECTS OF RECESSION ON TURKEY...

Remzi AKÇİN
UGM Chairman of the Board of Directors

A country is considered to be in a "recession" if it measures negative growth for six months. Under normal conditions, inflation is a trigger for growth. If inflation is accompanied by stagnation, stagflation is considered to exist. We have witnessed the Covid-19 pandemic and the Ukraine-Russia war, which have led to a recession. It is also true that these two factors have also led to inflation in Western countries at rates not seen in forty years. In this situation, should we talk about recession or stagflation? The world is not facing a recession, but worse, stagflation!

Looking at growth, inflation, and exchange rate data, it is clear that Turkey is not just facing stagflation or recession but a dire hyperinflation situation. The prices of import inputs are rising due to global inflation. Since imports are necessary for production, we import inflation into the world. Since imports cannot be financed by exports, the current account deficit creates exchange rate pressure. Turkey's economy is directly impacted when all these factors come together, leading to hyperinflation.

Recently, we have heard a lot about "the danger of recession in the world," Is a recession coming?" "Recession or stagflation?" and similar questions. Why have these statements become more frequent? What is the fear? What are the reasons? Most importantly, where is Turkey in this picture? How much will we be affected?

The frequency of these statements should indicate that "things are about to get worse." Let us first briefly explain the concepts of recession and stagflation.

WHAT IS A RECESSION?

Recession refers to "a continuous decline in a country's economy" and "prolonged economic stagnation." As can be understood from this sentence, there are two primary measures of recession. The first is "a decline in the country's economy," and the second is the "persistence of this decline." A recession is when economic growth is measured as unfavorable, while persistence is when the economy shrinks for two consecutive quarters, i.e., six months. If a country measures negative growth for six months, it is considered a recession. Here, we talk about a recession if the economic contraction is moderate. If the contraction is severe rather than mild, then a depression has occurred, not a recession.

WHAT IS STAGFLATION?

Stagflation is an economic term derived from the English words "stagnation" and "inflation." Under normal conditions, inflation triggers growth. Conversely, if stagnation occurs simultaneously in an inflationary environment, then stagflation is considered to exist.

HOW SHOULD THE SITUATION BE DEFINED?

The world has been struggling with the COVID-19 pandemic for nearly three years, and the process is still not over. When we think it is over, we encounter a new variation. Of course, the pandemic has had and continues to have devastating effects. During the pandemic, the world stayed at home. Production dropped due to the pandemic, and there were difficulties in the delivery of products. Naturally, this situation negatively affected the world economy.

The problem was more than just production and logistics. Countries increased the money supply to alleviate the pandemic's negative impact on the public; this reflected inflation in countries, and an inflation problem began to occur on a global scale.

CAUSES AND CONSEQUENCES OF THE CHIP CRISIS...

On the other hand, the pandemic has also changed consumption habits. Remote communication was emphasized, the use of mobile devices increased, and digital communication peaked. As the supply of products used for digital communication failed to meet demand, the supply of microchips, the primary input used in producing these products, also was unable to meet demand, and thus the chip crisis emerged. The shortage in the supply of chips hurt some sectors, particularly the automotive industry, which led to both a halt or reduction in production and an increase in prices, i.e., inflation.

Another dilemma was the dependence on a limited geography for critical inputs used in production. The fact that both the chip and especially the electronic inputs used in production are produced only in the Far East has spread the crisis that emerged here to the whole world. For example, automotive output on the European continent also went into crisis due to the unavailability of chips.

JUST WHEN WE SAID WE WERE SURVIVED FROM THE PANDEMIC...

Just when we thought we had survived the pandemic and at least got closer to normal, this time, Russia's invasion of Ukraine came to the fore. While usually, wars mainly affect the warring parties, the Ukraine-Russia war affects the whole world. The most important reason for this was the importance of these two countries in some strategic products. When Ukraine, known as the warehouse of Europe, "dominated in wheat, barley, sunflower, and oil production" and Russia's "production superiority in crude oil, natural gas, grain, and fertilizer" combined, the effects of the war on the whole world were very striking. Again, as always, this was reflected not as "only the supply of products" but as "an increase in the prices of the products."

RESULT BETWEEN EU AND RUSSIA…

The European Union (EU) and the USA especially reacted harshly to the Ukraine-Russia war. This reaction was not just a diplomatic statement but also a sanction. Accordingly, Western companies established in Russia have terminated their activities there. Russia imposed counter-sanctions and used its natural gas and oil leverage in response. It introduced the ruble requirement for the sale of these products. Then, he started to turn down the natural gas valve. The EU had already decided to impose sanctions against Russian natural gas. This bilateral showdown was reflected in the EU through natural gas shortages and price increases. Moreover, if the situation continues like this, in addition to the decrease in production, a problematic winter awaits EU citizens.

THE USA IS TECHNICALLY ENTERING A RECESSION…

This process, which we have briefly summarized, caused a contraction in the world economy to begin and continue increasingly. All international organizations have already expressed this. While the risk of recession was higher, especially in the European countries most affected by the war, we witnessed that "two-quarters of negative growth in the USA occurred in a row and the country technically entered recession," with the statement made on July 27.

EFFORTS TO OVERCOME THE CRISIS BY CREATING ABUNDANCE OF MONEY

Countries' efforts to overcome the crisis by creating an abundance of money during the pandemic and war again caused inflation to decrease all over the world. Inflation figures that have not been seen in more than forty years in the USA and the EU have been announced. Following this, we also witnessed an increase in interest rates.

We have witnessed that pandemics and wars lead to stagnation. These two factors have also caused inflation at rates not seen in forty years. In this case, should we talk about recession or stagflation? In our opinion, the world is not facing a recession, but worse, stagflation!

HOW WILL Türkiye BE AFFECTED?

We see that the course is not parallel when we examine how the pandemic and war process, which we summarized above, affected Turkey based on growth and inflation indicators. While there was a sharp contraction of .4 in the Turkish economy in the second quarter of 2020, when the first effects of the pandemic were seen, we see that in the following third quarter, a growth of 6.3% was achieved, and then a very high growth rate between 6.2 and !.9% was achieved. From this perspective, it would not be wrong to say that the pandemic and war did not have a recession effect on the Turkish economy; on the contrary, they had a doping effect. As you know, the pandemic started in our country in March 2020. When we look at the growth data of the Turkish Statistical Institute (TUIK) since the beginning of 2020, based on this date, we encounter the following graph:

SOURCE: TURKSTAT

When we examine the issue in terms of inflation, which is our second window, we see that we are faced with a much higher inflation than the world scale. Inflation rates every month for the same period are shown in graphs and tables as follows:

When viewed in the light of these data, it is an inevitable fact that there is no stagflation or recession in Turkey, but we are faced with the problem of hyperinflation.

VIEW FROM THE IMPORT WINDOW

Turkey has been pursuing an outward-oriented growth strategy since the decision announced on January 24, 1980, known as the "January 24 Decisions". Due to this strategy, it is directly affected by all economic fluctuations in the world. Therefore, Türkiye is directly affected by the global contraction, inflation and cross exchange rate increases.

As a result of the outward-oriented growth strategy, our exports are dependent on imports. 100% of our total imports are imports made within the scope of inward processing, in other words, imports made on the condition that they are used within the products to be produced for export. At the same time, almost P of our exports are exports under the inward processing regime. These rates show us the fact that we have to increase our imports in order to increase our exports.

Türkiye is dependent on imports for energy. Turkey imported 28 billion 925 million USD in 2000 and 50 billion 691 million USD in 2021. The increase in petroleum products due to the Ukraine-Russia war increased the bill paid. For the same years, 25 billion 183 million and 5 billion 498 million USD gold were imported, respectively. Naturally, energy and gold imports place a considerable burden on our country.