The Turkish economy has been struggling in recent years, experiencing rapid depreciation of the lira and a surge in inflation. While this may appear to resemble the emerging market difficulties of the 1990s, and also partly reflects the inflationary pressures affecting all of Europe at the moment, the underlying mechanisms are distinct and mostly self-inflicted. The recent economic situation in Turkey, the 6th most important trade partner for the EU with 3.3%, serves as a stark reminder of the consequences of mishandling monetary policy.
The European Union continues to be Turkey’s largest export and import partner (Figure 1) despite a declining trend in the recent years. Between 2018 and 2022, Turkey’s export share to the EU decreased from 43.1% to 40.5%, while the import share dropped from 33.3% to 25.6%. Austria represents a smaller portion of Turkey’s overall trade: Turkey’s export share to Austria remained relatively stable at around 0.7% over the last years, the import share however dropped from 0.7% in 2018 to 0.5% in 2022.From the European perspective, Turkey is the 6th most important trading partner for the EU with 3.3%. Turkey’s share in Austrian trade is about 0.7% (incl. intra-EU trade).
Over the past decade, Turkey has faced a combination of challenges including unstable growth rates, significant currency devaluation, and surge in inflation (Figure 2). In recent years, the issues have worsened, partially due to external factors such as the COVID-19 pandemic and the war in Ukraine, leading to very imbalanced pattern of growth and a significant accumulation of potential risks within the economic system. Turkish unconventional monetary policy, characterized by low interest rates and heavy reliance on credit, has played a significant role in exacerbating these issues. With President Erdogan securing another term, concerns over the direction of the monetary policy are stronger than ever and raising alarms for the future stability of Turkey’s economy.
However, it is important to note that the economic landscape hasn’t always been this way. In fact, during the first 10 years of President Erdogan’s rule, both he and the AKP were widely regarded as capable, conservative, and careful in their approach to economic policy. Yet, from the mid-2010s, Turkey started grappling with significant challenges. Political risk increased, such as due to Gezi Park protests in 2013 and coup attempt in 2016. Partly in response to this, the government started to erode the capacity and independence of state institutions.
In an effort to counter the economic slowdown during that period, the government implemented measures such as substantial infrastructure investments and low interest rates to encourage domestic borrowing (Figure 3). The impression increased that the central bank was being forced to keep interest rates low. However, these measures resulted in significant trade deficits, increased reliance on external credit, rapid depreciation of the lira, and a loss of confidence in monetary policy driven by prolonged periods of negative interest rates and mounting inflationary pressures.
Turkish monetary policy experiment as a cure for slowing growth and increasing inflation
Central bank independency in Turkey has been on decline in recent years. President Erdogan’s actions indicate that he does not hesitate to dismiss central bankers and finance ministers if they do not comply with his wishes. Since 2020, three officials were dismissed from their positions without a clear explanation, sparking speculation that their refused to lower interest rates may have been the primary reason for the termination[1]. President Erdogan believes that higher interest rates are the cause of rising prices, not a cure for them. He argues that keeping interest rates low will encourage consumer spending, business investment, and job creation. He also claims that a weaker Turkish lira against the US dollar would make exports more affordable, leading to increased demand from foreign consumers.
There is some truth to his arguments. The weaker lira does seem to have helped export growth in the last couple of years. And cheap credit has certainly supported consumer spending. Yet these policies entail significant consequences. Turkey heavily relies on imports such as fuel, gas, medicine, fertilizer, and other raw materials. When the value of the lira declines, the cost of purchasing these goods increases. Additionally, President Erdogan’s unconventional monetary policy has raised concerns among foreign investors who were previously willing to lend substantial amounts of money to Turkish businesses. Furthermore, implementation of lira saving scheme “KKM”, a state-backed foreign exchange-protected deposit, is transferring the risk of exchange rate fluctuations to the public sector, giving a rise to substantial contingent liability, and posing a risk for domestic financial stability.
At the beginning of 2022, when central bankers in Europe and the United States started to adapt tighter monetary policies by raising interest rates to tackle inflation, Turkish Central Bank started lowering its interest rate. This unconventional strategy has led to sharp depreciation of the lira and ever-more elevated inflation rates, with the year-on-year inflation rate reaching a 24-year high of over 85% in October 2022. Many analysts believe that the actual inflation rate on the streets is even higher than the official figures suggest [2].
To counter the impacts of surging inflation, the Turkish government has implemented several measures. These include raising the minimum wage and public worker wages by 55% and 45%, respectively. Beside the introduction of KKM scheme, the government has also enforced strict regulations on foreign-currency transactions conducted by companies. However, the effectiveness of these measures appears to be limited. As of April 2023, Turkey’s annual inflation rate was 43.7%, showing a downward trend due to base effects, but still extremely high compared to peer countries.
Rising inflation rates in Turkey, along with an increase in import prices and production costs, create major difficulties for households and businesses alike. Low-income households struggle to afford basic necessities as prices skyrocket, while businesses find it challenging to plan and invest in new projects due to unpredictable returns and mounting costs. In Turkey, just like in any other country, inflation is influenced by factors related to both demand and costs. Therefore, raising interest rates alone would not address the issue. It is essential to also keep in mind cost factors such as higher energy prices. Yet it remains clear that as long as real interest rates are deeply negative, the lira will depreciate, imported inflation will surge, and the economy will suffer.
What does the future hold?
With President Erdogan securing another term in office, immediate changes to monetary policy following the elections are unlikely. However, considering President Erdogan’s history of policy changes, and the pressure of the weakening lira and high inflation on the economy, a change of course is possible. If the central bank does raise interest rates, this would not be the first time that it has abruptly changed course; something similar happened in 2018 and 2020. The timing of any reversal will depend on the economic consequences of the current policies. If the lira continues to decline, the state’s contingent liabilities, linked to KKM and other potential risks will escalate. Thus, it remains plausible that adjustments may be made.
Accurately assessing demand and cost factors remains crucial for effectively managing inflation and utilizing interest rate policy in Turkey. A change in the monetary stance to something more orthodox, targeting small positive real interest rates, would not solve all of Turkey’s economic problems but certainly improve macroeconomic stability and provide the basis for a more stable growth rate. However, even without this, the economy has shown itself remarkably resilient. If foreign funding continues to arrive to plug the large current account deficit, it is likely that the year 2023 will end with a growth rate of around 2.6% and an inflation rate ranging between 40-50%, gradually easing the pressure on the exchange rate throughout the year.
Meryem Gökten is Economist at the Vienna Institute for International Economic Studies (wiiw) and country expert for Turkey. Her research focuses on macroeconomic analysis, fiscal policy, and monetary policy. Prior to joining wiiw, she worked as a researcher in the Financial Markets and Institutions Unit at Centre for European Policy Studies (CEPS), and as a consultant in the Country and Financial Sector Analysis Division at the European Investment Bank (EIB). She holds a master’s degree in economics from University of Freiburg and bachelor’s degree in economics from University of Heidelberg.
Richard Grieveson is Deputy Director at wiiw and Research Associate at the Diplomatic Academy of Vienna. He specialises in the economies of Central, East and Southeast Europe, with a particular focus on Turkey and the Western Balkans. Previously he worked as a Director in the Emerging Europe Sovereigns team at Fitch Ratings and Regional Manager in the Europe team at the Economist Intelligence Unit. He holds degrees from the universities of Cambridge, Vienna and Birkbeck.
The interactive graphics were created by Alireza Sabouniha. He is a research assistant at wiiw and a master’s student in Economics at the WU (Vienna University of Economics and Business).
One year ago, the world’s largest trade agreement, the RCEP agreement, was concluded. The trade of the EU and Austria with this region developed very dynamically in the last 20 years, with China playing the main role.
The RCEP Agreement
It has been exactly a year since another chapter of history in international trade was written and the largest trade block globally was formed. This resulted from the Regional Comprehensive Economic Partnership (RCEP) agreement implemented in January 2022, after ten years of negotiations. The RCEP gathered China, Japan, South Korea, New Zealand, Australia, and ASEAN countries into a unified trade block. This agreement assures the gradual elimination of tariffs between the RCEP members until 2040 and almost full commodity trade openness (90%). Great trade and growth implications globally are expected due to the size of this region. To demonstrate, RCEP countries together have approximately 70% higher GDP and over four times larger population than the EU. Thus, what we will likely witness in the next twenty years is a change in the gravity of the trade towards Asia-Pacific and away from the West (Quah, 2011; UNCTAD, 2021).
Strong momentum towards Asia even before the agreement …
Obviously, the dynamics whereby RCEP impacts the future of trade will mostly depend on China, RCEP’s dominant trade member. China alone takes up over half of the RCEP population and production. In addition, its role in international trade grew exponentially after its entry into World Trade Organization in 2001. Twenty years after its entry into WTO, EU trade with the RCEP members increased significantly: imports as a share of the total increased by 4.5p.p and export by 3.1p.p (see Figure 1, left). This trade boom with RCEP mostly attributes to China and at the expense of some other members like Japan whose export to the EU (as a share of the total) decreased from 2.8% to 1.2% over the corresponding period. The same narrative applies to Austria (Figures 1, right), although the RCEP 2020-2001 increase in trade share is smaller than for the EU as a whole.
… especially for high-tech products
However, the share of EU total imports from RCEP increased much more for high-tech goods (see Figure 2): from roughly 15% in 2001 to 24% in 2020. For Austria, the increase is even higher – a jump of 14p.p in the 20-year-period (Figure 2, right). Nowadays, almost 43% of total EU imports of computer, electronic and optical products, 26% of computer, electronic and optical products, and about 20% of machinery and equipment are sourced from the RCEP bloc. The export with the RCEP members also increased, although it represents lower shares of total EU and Austrian exports (see Figure 3).
This makes this sector particularly dependent and thus vulnerable given the further shift toward Asia and the potential changes in trade patterns resulting from the RCEP agreement. With this comes greater economic implications too, as the high-tech sector relies much more on R&D and innovation than traditional manufacturing. As such, high-tech sectors are an important catalyst of technological growth (Hornbeck and Moretti, 2018), especially in the times of digital and green transition. The obvious sign of risks already exists in relation to the recent semiconductor shortage, which put the production of many EU factories at a halt.
However, stagnation of trade relations in the last year
Even though only one year after the agreement implementation elapsed, we can witness a smaller decline or a stagnation of EU-RCEP trade (see Figure 1 and 2). EU export to the RCEP declined by about 1p.p, while Austrian high-tech imports from RCEP decreased by about 3p.p, the largest decline in high-tech trade with the new trade block in last 20 years. Not surprisingly, this shift is mostly driven by China alone (annual decline of 3.5p.p). This annual decline could be only a tip of the iceberg.
It is difficult to distinguish what drives this decline in the EU-RCEP trade as there are many factors at play. After the COVID-19 pandemic, new trends are on the trade horizon (i.e. nearshoring, reshoring, friend shoring) all marking the start of shorter supply chains, away from globalization. In line with this is RCEP trade bloc that is expected to contribute to the formation of the supply chain across the Asian-Pacific. On the other hand, the ‘EU’s Open Strategic Autonomy by 2040’ assumes a higher economic relationship between the EU and its neighborhood as well as its further trade positioning with respect to China. Besides this, the European Chip Act enacted in December 2022 aims to strengthen the resilience of the high-tech supply chains – precisely the EU semiconductor products for which the demand will double by 2030 according to the European Commission. All these trends should strengthen trade between geographically close countries at the expense of more distant countries. Hence, it is very reasonable to speculate that the next twenty years may bring lower trade with the RCEP due to trade distortion effects (see e.g. Stehrer and Vujanovic, 2022) resulting from the agreement, as well as further trade decoupling.
References
Hornbeck, R., & Moretti, E. (2018). Who benefits from productivity growth? Direct and indirect effects of local TFP growth on wages, rents, and inequality (No. w24661). National Bureau of Economic Research.
Quah, D. (2011). The global economy’s shifting centre of gravity. Global Policy, 2(1), 3-9.
Stehrer, R., & Vujanovic, N. (2022). The Regional Comprehensive Economic Partnership (RCEP) agreement: Economic implications for the EU27 and Austria (No. 054). FIW.
UNCTAD (2021), A new centre of gravity: The Regional Comprehensive Economic Partnership and its trade effects.
Nina Vujanović is an economist at wiiw, researching topics on international trade, foreign direct investment, and the Balkans. She previously worked as an advisor to the Vice Governor at the Central bank of Montenegro, as a consultant at UNCTAD (Division on Investment and Enterprise) and a research fellow at the WTO (Economic Research and Statistic Division). She published papers in the area of foreign direct investment, productivity, innovation as well as credit risk. She holds a PhD in International Economics from Staffordshire University and Msc in Economic Policy from University College London.
The interactive graphics were created by Alireza Sabouniha. He is a research assistant at wiiw and a master’s student in Economics at the WU (Vienna University of Economics and Business).
In her State of the European Union address this year, EU-Commission President Ursula von der Leyen stressed the need to rethink the European Union’s foreign policy agenda and to intensify cooperation with democratic nations (“the core group of our like-minded partners: our friends in every single democratic nation on this globe”) (Von der Leyen, 2022). Latin America plays an important role here. Thus, in the near future, the agreements with Chile, Mexico, in addition to the one with New Zealand, are to be ratified and the negotiations with Australia and India are to be advanced (ibid.). In concrete terms, this means modernising the trade part of the EU-Chile Association Agreement, ratifying the EU-Mexico Association Agreement and the free trade agreement with New Zealand. Furthermore, a comprehensive engagement strategy is to be pursued in Latin America, in cooperation with the G7, especially the USA (ibid.). Latin America thus fulfils two geopolitically important criteria for the European Commission: almost all states are democratically governed, and it is rich in raw materials, also illustrated by the action plan on the EU’s resilience to critical raw materials.
This article focuses on the economic importance of EU trade with Latin America. In total, the EU exported goods worth almost 2.2 trillion Euro to third countries in 2021. Of these, goods worth 114.9 billion Euro were exported to Latin America. This contrasted with imports from Latin America worth 98 billion Euro, resulting in a trade surplus with Latin America of 16.9 billion Euro from the EU’s perspective. As Figure 1 shows, the EU trade balance with Latin America has always been positive in the years since the global financial crisis (from 2012).
In relation to EU exports, Latin America thus plays a comparatively minor role with a share of 5.3% of total in 2021 (Figure 2). By far the most important destination region for EU exports were European third countries, which accounted for 34.5%, followed by Canada and the USA with 20%, China with 10.3% and Africa with 6.7% of the total. Other important export partners by volume are Japan with 2.9%, Korea with 2.4% and India with 1.9% of the total export volume to third countries.
Compared to 2011, the share of EU exports to Latin America in total EU exports actually fell slightly from 5.7% to 5.3%. While the volume of trade with Latin America has grown by around 23.9% since 2011, total EU exports increased by 34.3% (Figure 3). By comparison, exports to China and Canada and the US grew particularly strongly, each increasing by around 77% over the same period.
Within Latin America, the European Commission’s prioritisation reflects the relevance of Chile and Mexico for European export markets. Mexico is the European Union’s most important trading partner in Latin America, followed by Brazil (included here in Mercosur) and Chile (Figure 4).
The negotiations on the EU-Mercosur Association Agreement have been concluded, but the agreement itself is currently “on ice”. From the EU’s point of view, the main obstacle to the ratification of the Association Agreement have been reservations about environmental protection. In Brazil, which dominates the Mercosur group, environmental protection has been weakened on many levels under the Bolsonaro government, and deforestation and the further development of the Amazon region have been promoted. In concrete figures, this means that in 2021 alone, more than 13,000 km² of rainforest (which is more than the area of Tyrol) was cleared, and in 2022 even more. The agreement would take such environmental reservations into account, but as Grübler at al. (2020) conclude, that a trade agreement cannot be a better instrument for enforcing environmental commitments than an environmental treaty. Whereby such clauses are not new in themselves. Environmental clauses in free trade agreements in general have increased significantly since the 1990s (Meinhart, 2022).
With Brazilian President-elect Luiz Inácio da Silva, a new window of opportunity to ratify the agreement could open up. During his election campaign, he announced his goal of concluding the agreement within six months of his re-election, but also him wanting to renegotiate parts of the agreement. At the COP27 summit, as well as previously, he emphasised that combating deforestation in the Amazons will have the highest priority. His credibility in this respect is demonstrated by the significant reduction in deforestation under his presidency from 2003 to 2010. With a view to the European Parliament elections in 2024, where a deal seems unlikely during the election campaign, a window of opportunity opens up for both sides in 2023. The EU’s foreign trade policy is certainly facing a conflict of goals between geopolitical and trade policy interests and the goals it has set itself for the Green Deal. Latin America is a good example of this, with the great economic importance of agricultural and raw material exports on the one hand and the EU’s need for raw materials on the other. Almost 41% of Latin American exports are currently accounted for by raw materials such as rare earths and agricultural goods, and a further 17.8% (as part of the production of material goods) by the production of food and animal feed (Figure 5). In contrast, more than 95% of European exports to Latin America are material goods. The most important sectors from the EU’s point of view are machinery and vehicles as well as chemical and pharmaceutical products.
Latin America is thus relevant for the supply of critical raw materials to the European Union. For example, the European Commission expects EU demand for rare earths, currently dominated by China, to increase fivefold by 2030, and even eighteenfold for lithium. According to the EU Action Plan for Critical Raw Materials Resilience published in 2020, the European Union sources rare earths almost exclusively (98%) from China (European Commission, 2020). In contrast, for lithium, which is particularly important for battery production, Chile is the world’s largest producer and the most important supplier for the European Union (ibid.) Mexico, for example, is the largest non-Asian processor of bismuth and Brazil, likewise among the main producers of several critical raw materials. In the race with China, Latin America accordingly already plays an important role, whose relevance for the EU – especially also in the context of the current geopolitical changes – will increase.
References:
European Commission. (2020). Communication of the European Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Critical Raw Materials Resilience: Charting a Path towards greater Security and Sustainability COM(2020) 474 final, Brussel.
Grübler, J., Reiter, O. und Sinabell, F. (2020). EU und Mercosur – Auswirkungen eines Abbaus von Handelsschranken und Aspekte der Nachhaltigkeit. WIFO Monatsberichte 11/2020.
Meinhart, B. (2022). Greening Trade? Environmental Provisions in Trade Agreements. FIW- Policy Brief, (55).
Von der Leyen, U. (2022). Lage der Union. Rede. https://ec.europa.eu/commission/presscorner/api/files/document/print/de/speech_22_5493/SPEECH_22_5493_DE.pdf
Bernhard Moshammer is Economist at wiiw. His research focuses on European economic and political-economic issues. He has previously worked for the Austrian Federal Chancellery on EU affairs and on housing policies at the Austrian Chamber of Labour. He holds a degree in Economics from the Vienna University of Economics and Business and an M.A. in European Interdisciplinary Studies from the College of Europe, Natolin Campus in Warsaw, Poland.
Since the start of 2022 the euro depreciated by some 15%, beginning the year at 1.14 USD per EUR and declining below parity towards 0.97 recently. One major factor causing this decline can be viewed as truly exogenous: the war in Ukraine was unexpected and resulted in several rounds of sanctions imposed on Russia, with sizeable negative repercussions on the EU’s export volumes and impairments for active foreign direct investment (FDI) of EU-firms in Russia. The EU received a second blow through rising energy prices. Many member countries showed a high dependence on Russian gas and oil, and the Russian government deliberately used its position to generate uncertainty in spot as well as futures gas markets leading to severe risk premiums after sanctions and countervailing measures by Russia were going back and forth. Due to its high dependence on Russian energy, the euro area suffered a set-back as a business location, making the euro area less attractive for passive FDI, destroying potential output, and finally leading to a depreciation of the euro vis-a-vis areas less exposed to Russia as a trade partner.
There is a second endogenous source for the devaluation of the euro, resulting from the build-up of inflationary pressure throughout the world economy, except Japan. The US-Federal Reserve Bank (Fed) was first confronted with rising inflation rates since in April 2021 (+4.2% YoY) while inflation in the euro area at that time still remained below target (+1.6% YoY). Both monetary authorities interpreted higher inflation rates as energy driven and transitory but by December 2021 the Fed changed its opinion and corrected its forward guidance from accommodative to restrictive. The Fed first announced to unwind its asset purchase program and started to increase the target rate by March 2022, while the ECB waited until the end of July 2022 to follow suit. By the end of September 2022 the target range for the US-interest rate reached 3% to 3.25% and the euro area‘s main refinancing rate was at 1.25%, creating an interest rate differential of almost 2 percentage points.
Deviations between US and European short term interest rates were a regular feature in the past. Figure 1 shows the interest rate differential between the US-target rate and the corresponding European equivalent from 1985 through 2022. A positive value on the horizontal axis implies that US-rates were above the main refinancing rate in the euro area. The vertical axis shows the exchange rate measured in USD per EUR. The slight negative slope of this cloud indicates that relatively high target rates in the US go along with a strong US-dollar, while a relatively high refinancing rate in the euro area typically involves a strong euro. The red dots in Figure 1 show the development from January to September 2022; the movement towards the lower right hand corner reflects the more aggressive policy stance in the USA together with the appreciation of the US-dollar.
Figure 1 – Relatively higher domestic interest rates support the home currency
Starting from this situation, what can we expect for the rest of 2022 and the following year? The WIFO forecast (Glocker – Ederer, 2022) expects a further tightening of monetary policy in both areas with the ECB acting more decisively such that the interest rate differential will be reduced to around 0.5 percentage points at the end of 2023. Accordingly, the euro will appreciate slightly (green dots in Figure 1), resulting in annual averages of 1.05 (2022) and 1.04 (2023) USD per euro with a trough in fall 2022. This development can be interpreted using the uncovered interest rate parity condition: after the US-monetary tightening, the USD must jump to a lower value (appreciation) in order to keep the interest parity condition valid, thus providing room for a consecutive depreciation which balances higher US-interest rates (Dornbusch, 1976). This adjustment mechanism does not hold empirically, however (Engel, 2014). A time-variable degree of asset market segmentation (Alvarez et al., 2009) or a liquidity premium on the deposit earning higher interest (Engel, 2016) provide alternative explanations.
Does the USD-EUR exchange rate actually jump around announcements dates of monetary policy actions? Figure 2 offers some insight. The lines in Figure 2 depict the exchange rate during the 10 business days before and after a monetary policy meeting, on which either the Fed (green) or the ECB (blue) announced a change in their target rate. To facilitate comparison, I norm the exchange rate for all episodes to unity at the day of the monetary policy announcement, thus a value of 1.02 indicates that the exchange rate was 2% above the level prevailing at the announcement date. The period runs from 16.3.2022, when the Fed published the first rate-hike through 21.9.2022, when the Fed increased the target range to 3% to 3.25%. Because both central banks explicitly use forward guidance, their moves appear to be somewhat expected. While the ECB does not seem able to move markets, the Fed announcements effectively make the dollar stronger, either at the date of the publication or even five to ten days ahead. Whether the ECB policy decision on 27.10.2022 includes some surprise element for the participants on the foreign exchange market, can be tracked in real time in Figure 2 over the next ten business days following the announcement date.
Finally, will there be consequences from the euro’s depreciation on the real economy? Probably price effects will dominate over the forecast horizon. A weaker euro implies higher import prices on intermediates, energy, consumer products, and tourism services in a period already plagued by inflationary strain. Such an environment makes it easier to pass-through higher import prices on to euro area customers. Positive wealth effects related to foreign USD-denominated portfolio investments by Europeans, however, will not compensate the price losses on international asset markets during 2022. Consequently, the potential positive effect on euro area consumption will remain limited. A cheaper euro will boost euro area exports, but at the same time weak foreign demand is likely to be the dominating force affecting international trade flows.
is Senior Economist at WIFO and has been working in the Research Group “Macroeconomics and European Economic Policy” since 1994. From 1999 to 2002 he was editor-in-chief of WIFO-Monatsberichte (WIFO Monthly Reports). He is an expert in the Austrian Fiscal Council, lecturer at the University of Vienna and head of the Working Group on Economic Statistics and National Accounts of the Austrian Statistical Society. He works on issues of risk diversification, funded pensions, the European Monetary Union and econometric applications in the field of macroeconomics.
The international economic environment has deteriorated significantly since the beginning of 2022, mainly due to the knock-on effects of the Russia-Ukraine conflict, and the outlook for the global economy and global trade has clouded considerably. The energy price shock and the massive price hike, as well as uncertainty about the availability of gas, are causing dislocations above all in material goods production and exacerbating supply-side shortages due to supply bottlenecks and the aftermath of the COVID 19 pandemic. Consumer confidence and corporate production expectations are falling worldwide, most sharply in the euro zone.
Domestic manufacturing and, in particular, exports proved to be very robust in the first half of 2022 in the face of the negative influences of massive increases in raw material and energy prices, labor shortages, supply bottlenecks and high uncertainty. Austrian merchandise exports expanded strongly in the first half of 2022, with extremely dynamic growth in Q1 2022, which – despite the onset of the Russia-Ukraine crisis in March 2022 – continued only slightly weaker in Q2 2022. The growth of exports of goods reached 19.2% at current prices (nominal) and 14.1% at constant prices (real) by June 2022. The widening gap between the nominal and real trends reflects rising export prices. Austria’s goods export performance was hardly outperformed by any other EU country. Germany, France and Italy recorded significantly lower growth, but goods exports of many smaller European comparator countries, such as Sweden, Finland or the Netherlands, also grew more slowly than in Austria.
Industrial intermediate goods (“processed goods”) have so far made one of the highest contributions to growth in total merchandise exports. This was a consequence of still stable industrial production through increased production in stock with key trading partner countries in order to escape threatened shortfalls in energy supplies and further price increases. The equally high contribution to growth made by Austrian machinery exports was due in particular to strong demand from the USA. The high order backlog in the German capital goods industry also contributed to growth in Austria’s machinery exports. The contribution from energy and raw material exports was mainly price-driven rather than due to an expansion in export volumes. The otherwise important Austrian automotive and automotive supply industry made hardly any contribution to export growth. This is closely related to the crisis in the German automotive industry.
Leading indicators, which remained at a high level until the end of Q2 2022, now also point to a sharp slowdown in export momentum in Austria in the second half of 2022. In the WIFO Business Survey, exporters continue to assess order books from abroad as predominantly positive, but the share of positive reports has declined significantly since June 2022. Export expectations have been significantly scaled back for the first time since the COVID-19 crisis, and negative expectations for export business predominate. As a result, the outlook for new export orders for the remainder of the year is much more subdued. In Q3 2022, export growth should still be fed by the high order backlogs of previous months and diminishing material bottlenecks in domestic production. In the further course of the year, the negative consequences of the Russia-Ukraine crisis are likely to have an increasing impact on Austrian exports of goods. Austria’s strong ties with the CEECs and Germany, which are particularly affected by the current crisis, will contribute to this, as will the expected decline in production in Austria’s manufacturing sector due to high energy prices – especially natural gas prices. This effect is amplified by the loss of international competitiveness, especially in non-European exports – currently, European and Austrian industry faces gas prices about seven times higher than those in the U.S., for example, and competitive advantages for exporters due to the devaluation of the euro hardly outweigh this. However, the direct negative effect of energy prices on manufacturing in Austria is likely to be somewhat weaker than in Germany, especially since the natural gas intensity of Austrian industry is somewhat lower.
The forecast assumes that there will be no official business closures due to the COVID 19 pandemic in Austria or in key trading partners that would affect the export industry until 2023. It is also assumed that the Russia-Ukraine war will continue and that the sanctions against Russia will remain in place. It is not assumed that Russia will completely halt natural gas supplies to Europe, but uncertainties, especially regarding price developments, are assumed to remain and thus the level of natural gas prices will remain high. In this environment, some of Austria’s main trading partners are facing a sharp economic slowdown, which will lead to recession in 2023 in Germany, Italy and CEEC. The revisions in the international economic outlook since the beginning of the year have been enormous, shaping the forecast picture of all major international organizations (European Commission, OECD, IMF, World Bank) and reflecting the increasing distortions of the Russia-Ukraine conflict and the strikingly higher world market prices of energy and raw materials. As a result of the cooling of the global economy in 2023, the problem of bottlenecks in supply chains should subside. The situation is also expected to ease for freight rates in international transport and for the prices of crude oil and industrial raw materials.
Under these changed conditions, Austrian export momentum will decline sharply, especially at the end of 2022, but supported by the extraordinarily good performance in the first half of 2022, will lead to annual growth in goods exports of around 8%, almost matching the previous year’s growth (2021: +9.3%). At 10.0%, import prices will rise much faster than Austrian export prices (+5.9%) in 2022. The high world market prices for raw materials, energy and intermediate goods thus cause a strongly negative terms-of-trade shock, which is further amplified by the depreciation of the euro. As a result, the Austrian trade balance will be burdened this year with a negative price effect of around € 8 billion. Positive volume effects due to a smaller increase in import volumes than in export volumes will dampen this negative effect, so that the trade balance is expected to deteriorate by a total of €4.3 billion in 2022 to a deficit of approx. 17 billion in 2022.
Im Jahr 2023 erreicht das österreichische Marktwachstum auf Basis der schwachen internationalen Importprognosen für die
In 2023, Austrian market growth will only reach around 0.4% based on weak international import forecasts for its trading partners. Above all, the gloomy economic outlook for Austria’s most important export markets in the euro area and the increasing deterioration in international competitiveness make it increasingly difficult to maintain market shares, especially in energy-intensive and important parts of the Austrian export industry (chemicals, steel, paper). Exports of goods in 2023 are stagnating, as are imports. The terms of trade, i.e. the ratio of export to import prices, will continue to deteriorate in 2023, to a much lesser extent than this year, but the negative price effects will nevertheless remain the main reason for the further increase in the trade deficit in 2023 by €2.6 billion to €19.7 billion.
is Senior Economist in the research area “Industrial Economics, Innovation and International Competition” and has been working at the Austrian Institute of Economic Research (WIFO) since 1992. From 2013 to 2016, she was Deputy Director of WIFO. She studied economics at the University of Vienna and received her PhD from the University of Innsbruck. Stays abroad at renowned universities in the USA (University of California, Los Angeles, and Stanford University) have accompanied her career since then. Her research focuses on the empirical analysis of international trade issues, including foreign direct investment. The preparation of the foreign trade forecast is one of her regular activities at WIFO.
