11 Temmuz 2012 Çarşamba

The unpleasant low growth perspective


According to the Turkish Statistics Institute (TurkStat), the Turkish economy grew by 3.2 percent on a yearly basis in the first quarter. For the sake of comparison, let me highlight the fact that the yearly growth rate was above 11 percent in the first quarter of 2011 and above 5 percent in the last quarter.

Moreover, TurkStat estimated the quarter to quarter seasonally adjusted growth rate as minus 0.4 percent. Although current leading indicators predict a much better growth performance for the second quarter, the Turkish economy is obviously facing a deceleration of growth.
Is it a transitory phenomenon? I do not think so, even if it is true that there is a base effect because of the significant growth in the first quarter of 2011. To understand if the low growth is transitory or not we should analyze the sources of growth. Private consumption, which constitutes the largest share of gross domestic product (GDP) with 70 percent, stagnated. Therefore, it did not contribute to growth at all. Private investment increased by a mere 1.6 percent, while the public sector grew by 5 percent. The contribution of domestic demand to growth remained less than 1 percentage point.
Given this very weak domestic demand, firms reduced their stock, and this resulted in a contraction of 2.3 percentage points. So, the growth rate of 3.2 percent resulted mainly from net exports: Indeed, exports increased by 13 percent, while imports decreased by 5 percent. Therefore, the contribution of net exports to growth has been 4.5 percentage points. To know whether this relatively low growth -- around 3 percent -- will be there for a long time, we have to answer two questions: First, is there some room to increase domestic demand without jeopardizing the current account deficit (CAD) and inflation targets? Second, can net exports' contribution to growth be made permanent?
My answer to the first question is “Yes, but not that much.” Regarding inflation we can say that Central Bank of Turkey stays in a relatively comfortable situation thanks to decreasing energy and food prices. Its forecast for the year end, set in the first quarter, is 6.5 percent but Governor Erdem Başçı announced recently that this figure could be lowered very soon. Moreover, last Friday we witnessed a decrease in interest rates by the Central European Bank as well by the Bank of England. So, the Turkish Central Bank has some room to relax its tight monetary policy to some extent, but there are limits to this: The inflation target is set at 5 percent, and there is still a long way to go to arrive at this rate. Too low interest rates can trigger capital outflows, causing exchange rate shocks; TL depreciation is not good news for inflation. Too low interest rates could also trigger a new consumption boom, pushing up prices. To sum up, I think the possibility of giving a push to the domestic demand via monetary policy is limited. Let me highlight that last Friday Governor Başçı pointed out that it is too early to consider changing their position and that they will wait to see the second quarter growth figures.
The other possibility could be loosening fiscal policy. But we should note that a loosening is already on the way to some extent since tax revenue is decreasing along with decreasing growth, while public expenditure is continuing to increase. The budget deficit will probably be a little bit higher than last year, (my estimation is 2.5 percent instead of 1.5 percent), but this is the limit which must be respected. If not, as Deputy Prime Minister Ali Babacan likes to say, expectations could worsen, causing adverse effects on investments and market interest rates.
If there is only limited room to increase domestic demand, what about exports? Two points have to be underlined: Global demand conditions, particularly in Europe, are not good, and a deceleration in the increase of Turkish exports has been quite perceptible in the last few months. The leading indicators show that the increase of exports in the second quarter will be less enthusiastic. Even though positive contribution of net exports has to be expected during the next quarters, in the long run this depends on a radical improvement of competitiveness of Turkish industry through lower production costs and extensive innovations. Now, improvement depends on radical reforms in the labor market, in taxation, in education and in the R&D field.
For the moment we have just a new incentive scheme and a new trade law. The first one aims to lower labor costs in the least-developed regions, but only for new investments, and also to encourage some import substitution. Let's note that has not yet been implemented. The new trade law aims to improve the functioning of the market economy, but let me note also that last-minute compromises have diminished the effectiveness of the new regulations. However, on the other hand, let me highlight that the regional minimum wage project has definitely been abandoned and the severance pay reform postponed as well as the tax system reform.
I believe, as an economist tracking the Turkish economy for quite a long time, that it can grow hardly more than 4 percent in the long term as long as the high growth episodes depend on ephemeral domestic demand booms, which unavoidably hurt the wall of high inflation as well as the high CAD.

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