After hitting an all-time high at the end of 2011, the current account deficit saw a major correction in 2012. Although there has been some deterioration in the 12-month cumulative current account deficit since early 2013, this is largely due to the gold market dynamics, which is a temporary factor. In terms of the current account balance excluding gold, the correction that started in 2012 has continued into 2013, albeit more slowly (Chart 11). 2  BIS central bankers’ speeches  We expect real exchange rate and credit developments to support the economic rebalancing over the upcoming period. The real effective exchange rate depreciated after the recent nominal exchange rate developments and largely retreated from the levels that can be called excessively overvalued (Chart 12). We expect the current account balance to correct further in the forthcoming period amid expectations for a more acceptable rate of loan growth, a moderate final domestic demand growth and developments in the real exchange rate. This will cushion the Turkish economy against the potentially high levels of global uncertainty in the upcoming period by strengthening its financial stability and supporting the re-balancing process. In sum, uncertainty continued to reign over financial markets in the third quarter of 2013 and financial conditions tightened (Chart 13). The tightening of the index is mostly due to weak capital inflows, rising loan rates and higher market rates. 2. Macroeconomic developments and assumptions  Now, I will talk about the macroeconomic outlook and our assumptions on which our forecasts are based.

Now, I would like to talk about developments in economic activity and the short-term outlook, on which the inflation forecasts are based. Economic activity was more favorable in the second quarter of 2013 compared to the outlook set in the July Inflation Report. The stronger-than-expected economic activity was mostly driven by changes in inventories. Private consumption demand saw a dramatic recovery, while final domestic demand remained almost flat due to slowing public demand (Chart 18). On the other hand, imports grew strongly, while exports increased only modestly due to weak global demand. Indicators for the third quarter of 2013 suggest that economic activity will grow more moderately than in the second quarter. In the July-August period, production of consumer goods was down from the previous quarter, while imports of consumer goods continued to rise. On the investment side, indicators show a weaker outlook compared to consumption demand. While exports were flat, imports saw a remarkable decline. Therefore, we expect the negative contribution of net exports to growth to decrease in the third quarter. Meanwhile, the export-weighted global growth index remains virtually unchanged from the previous reporting period (Chart 19). Final domestic demand is likely to continue to recover modestly in the second half of the year. Thus, we revised output gap forecasts slightly upwards for 2013. However, downside  BIS central bankers’ speeches  3  risks to recovery increased following the latest financial developments. Accordingly, we revised output gap forecasts downwards for 2014.