UniCredit Head of Research Valli: Exports and growth will slow down, inflationary pressure will increase

Elif KARACA

Marco Valli, Head of Global Research at Italian banking group UniCredit, said that exports and growth in Turkey will slow down in the second half of the year, increasing external financing needs will put pressure on the TL and increase the upside risks to inflation. Answering the questions of the WORLD, Valli stated that the slowdown in exports will cause an increase in the current account deficit, and that the decrease in the euro/dollar exchange rate also contributed to the increase in the current account deficit by increasing the deterioration in the foreign trade balance. Valli is also concerned with the prospect of recession in Europe, especially since the slowdown in Europe is more dependent on the EU market. automotive and textile industries, he said.

Stating that the slowdown in European economies will put downward pressure on Turkey’s growth through foreign demand, since exports to EU countries account for more than 40% of total exports, Valli also reminds that the annual growth rate of Turkey’s goods exports has already slowed down since the second quarter. . Stating that Turkey’s access to cheap energy may provide some support to its exports and that exports will make the second largest contribution to 2022 growth after private consumption, Valli thinks this is mostly a reflection of the strong performance in the first half of this year.

-Do you think that inflation has peaked in the USA and Europe and will gradually decline in the coming period, or are there still upside risks? Do you think the Fed and ECB are too late to intervene?

Inflation has probably peaked in the US, but we can’t say the same for the euro zone, which is expected to go towards 10 percent in a short time. However, the August CPI data, which shows that core inflation in the US remains stubbornly high, tells us that “peak” is not really the most important thing. Here the speed of the downtrend will be much more important. The Fed intervened too late and now has to deal with excessive demand and an overheated labor market. Therefore, until demand slows down and prices drop, interest rates need to be pushed higher. However, this increases the risk of over-tightening and a hard landing.

The task of the European Central Bank (ECB) is much more difficult, as inflation is predominantly supply driven and puts downward pressure on economic activity by eroding household real incomes and corporate profits. Euro The structural deficiencies of the region create the risks of fragmentation and deterioration in the transmission mechanism of the monetary policy, making it difficult to overcome the difficulties. Overall, I don’t think the ECB is acting too late.

– Considering rising energy costs and supply disruptions from Russia, do you believe that the ECB can reduce inflation without causing a recession in Europe?

I’m skeptical about this. First of all, there will likely be a recession regardless of ECB actions. The pressure created by high commodity prices is a very strong barrier to the economy’s continued growth. Second, the ECB does not limit itself to the rate to fix inflation expectations. At its September meeting, the ECB made it clear for the first time that it wanted to “cut down” economic activity to reduce the risk of runoff. We find this worrisome because it means that the ECB wants to bring inflation down quickly, despite the fact that domestic demand is below pre-pandemic levels, despite the fact that price pressure largely reflects external factors. Under these conditions, higher interestThis will accelerate the deceleration in economic activity and make it harder for governments to find ways to mitigate the effects of the energy shock without using too many new resources. It should be noted that the effects of monetary policy are seen with a lag.

What would be the effects of a slowdown in European economies for Turkey? Which sectors are most affected?

The slowdown in European economies will put downward pressure on Turkey’s growth through the foreign demand channel, as exports to EU countries account for more than 40% of total exports. The impact of the recession on the automotive, textile and clothing sectors could be greater given their greater dependence on the EU market. However, Turkey’s access to cheap energy energy can give some support to its intensive exports. We expect exports to contribute approximately 2 percentage points to growth, which may exceed 5% this year. As a result, exports will make the second largest contribution to 2022 growth after private consumption. However, this is mostly a reflection of the strong performance in the first half of this year.

-What kind of performance do you expect for the second half of the year on the export and growth side?

We expect both growth and exports to lose momentum in the second half of the year. The annual growth rate of Turkey’s goods exports has already slowed down since the second quarter. In this regard, since the share of euro invoice transactions in Turkey’s exports is larger than its imports, euro/dollar The decrease in the exchange rate also increases the deterioration in the foreign trade balance and is effective in the increase in the current account deficit. Demand conditions will be less inflationary as growth slows down, but the slowdown in exports will cause the current account deficit to increase. Increasing external financing needs, on the other hand, may put pressure on the TL and increase the upside risks to inflation.

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