Headline: "CBRT Blog Analyzes Sustained Growth in Turkey's Exports to the EU"

Forex - A recent post on the blog page of the Central Bank of the Republic of Turkey (CBRT) assessed that Turkey's exports to the European Union (EU) are expected to continue to rise.

The blog article titled "Determinants of Turkey's Exports to the European Union" was written by Mahmut Günay, Chief Advisor to the CBRT, Assistant Expert Furkan Höçük, and Expert Ahmet Bilal Kurtoğlu, and published on the Center's official website.

The blog highlights the exports to the EU, Turkey's primary trading partner, and summarizes findings related to the determinants of these exports.

The blog post states: "The Turkish economy is undergoing a balancing process in terms of growth composition since the third quarter of 2023. On the other hand, the relatively weak trend in global growth is affecting export performance in Turkey, just as it is around the world. In this blog post, we focus on exports to the European Union (EU), our main trading partner, and summarize our findings regarding the determinants of these exports.

From 2002 to 2007, Turkey's real exports to the EU increased steadily (Graph 1). However, the global financial crisis in 2008 caused a significant decline in exports. As the effects of the crisis eased, Turkey's exports to the EU recovered and showed a stable growth trend between 2010 and 2019. In more recent times, following a sharp decline caused by the Covid-19 pandemic, exports quickly rebounded and even exceeded the levels implied by pre-pandemic trends. Since the last quarter of 2022, however, exports have been below the levels implied by the trends of 2010-2019. On the other hand, a recent increase in exports outside the EU has prevented a decline in Turkey's total exports (Graph 2). This situation can be seen as an indication that EU-related factors also play a role in the weakening of export performance to the EU.

After the third quarter of 2022, when Turkey's exports to the EU weakened, the divergence between EU national income and EU goods imports draws attention (Graph 3). We observe that the ratio of EU goods imports to national income, which rose post-pandemic, has been declining since the last quarter of 2022, converging back to pre-pandemic levels (Graph 4). Meanwhile, the ratio of service imports to national income continues to rise. Studies on recent import dynamics in the EU reveal that the decline in the income elasticity of imports stems from several factors. These factors include changes in the composition of demand and reductions in stocks. Additionally, a shift in private consumption from goods to services is also contributing to the decline in the income elasticity of imports. In this context, we evaluate that recent changes in Turkey's exports to the EU could be influenced by adjustments in the EU economy post-pandemic.

To analyze the factors affecting Turkey's real exports to the EU, we initially estimate two separate equations that include the main determinants of exports: demand and relative price. In the equations, we use the real effective exchange rate based on developed countries for relative price, and EU GDP and EU imports as demand indicators. To capture the pandemic's impact, we separately estimate the models for the periods 2003Q1-2024Q2 and 2003Q1-2019Q4. The estimation results indicate that the EU demand indicator is the principal determinant of Turkey's exports of goods to the EU (Table 1). Findings from similar previous studies also highlight that the EU demand indicator is a key determinant of Turkey's exports to the EU.

The model using EU goods imports as the demand indicator (model 2) has shown to be more aligned with recent realizations, whereas the model using GDP implies a higher level of imports (Graph 5). During the post-pandemic reopening period (2020Q1-2021Q3), it was observed that the model using GDP as the demand indicator underestimated actual imports. This situation suggests that changes in the income elasticity of EU goods imports after the pandemic have also played a role in the trajectory of exports to the EU post-pandemic.

Despite the reduction in the ratio of EU goods imports to national income, Turkey’s share in EU imports has gradually risen since January 2023 (Graph 6). In other words, the negative impact of market conditions in the EU on exports is partially compensated by market share gains.

In conclusion, the recent weak trend in exports to the EU can be associated with the fact that the EU's national income remains below its pre-pandemic trend, along with the decrease in the income elasticity of imports. On the other hand, according to projections from international institutions and investor organizations, both the gradual increase in EU GDP growth and an expected convergence of the growth of EU imports to historical averages are anticipated. We evaluate that this situation will support Turkey's exports to the EU, and with the positive outlook in market share, exports to the EU will continue to rise."