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Tighter Global Conditions Amid Inflationary Pressures

Globally, 2022 was marked by efforts to contain inflationary pressures resulting from both lagged effects of expansionary policies supporting economic activity during the pandemic and also record high commodity prices further boosted by the Russian invasion in Ukraine. Alongside the challenges posed by postCOVID normalization policies, tighter financial conditions and geopolitical risks due to Russian-Ukrainian war led to a slow-down in the world economy. With these developments, the annual GDP growth slowed down to 2.1% in 2022 from 6.0% in 2021, while seasonally adjusted annual growth in the Euro Area in the last quarter of 2022 declined to 1.9%. On the inflation side, annual consumer inflation rose to 6.5% in the USA and 8.5% in the Euro Zone in 2022.

High course of global inflation maintained upward surprises and drove global central banks to tighten monetary policies faster and more aggressively than expected, which has increased financial volatility and reinforced concerns over recession. US Federal Open Market Committee (the Fed) prioritized to bring down inflation and claimed that tight labor market conditions would help to achieve a soft landing. The Fed delivered rate hikes of 450bpssince last year and took the funding rate up to 4.50-4.75% as February 2023, while keeping a hawkish stance in communication. Similarly, the European Central Bank (ECB) increased the refinancing rate to 3.0% from 0%, leaving the door open for further tightening.

According to our projections, we expect monetary policies to remain prudent and growth dynamics to weaken further amid high uncertainties rooting from risks on energy prices and continuing bottlenecks posed by the Russian-Ukrainian war. In this context, we expect the US economy to stagnate with 0.5% GDP growth rate in 2023. Eurozone will suffer more, particularly from high natural gas prices and face a short lived recession with -0.1% GDP growth rate. Growth outlook in China, on the other hand, is considered to become a supportive factor in order to restart a recovery for the world economy, accelerating to 5% GDP growth in 2023 from 3.6% in 2022.

Looking ahead, the outlook would remain negative given the uncertainties on inflation, the need to extend a period of tight monetary stance, and accordingly the consequence of weaker growth rates. All of these factors present a major challenge for emerging economies as the increased risk premium might limit capital inflows. While the main risk is the global recession driven by interest rate hikes of central banks across the world as a response to inflation pressures, other downside risks on global activity include a further deterioration of the Russian-Ukrainian war which could lead to significant energy shortages in Europe and a hard-landing in Chinese economy

GDP Growth Projections* (Annual Change)

2021 2022 2023 2024
USA 5,9 1,9 0,5 1,8
Eurozone 5,3 3,2 -0,1 2,0
Spain 5,5 4,6 1,2 3,4
Latin America 6,7 3,4 0,5 1,6
Argentina 10,4 5,0 -0,5 -2,0
Brazil 4,6 2,4 0,3 2,0
Chile 11,7 2,3 -1,0 2,1
Colombia 10,7 8,0 0,7 1,8
Mexico 4,9 3,0 0,6 2,1
Peru 13,6 2,7 2,5 2,4
Türkiye 11,4 5,5 3,0 -1,5
China 8,1 3,6 5,0 5,0
World 6,3 3,3 2,3 3,3

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