Worries on economic growth

Düşük büyüme Başçı'nın başını ağrıtabilir The publication of the December 2012 Industrial Production Index by the Turkish Statistics Institute (TurkStat) last Friday sparked worries about the state of growth of the Turkish economy. The seasonally adjusted Industrial Production Index decreased by 1.5 percent from November, and on a quarterly basis the index almost stagnated from the third quarter to the fourth. It was commonly agreed that the 2012 growth rate would definitely be lower than 3 percent by a few percentage points, but economists are now forecasting a lower growth of around 2.5 percent. Asaf S. Akat, a prominent economist, put it well when he said, “2012 appears as a lost year with regards to economic growth.” So what about this year's growth?
In my Dec. 31 column, “Two scenarios for the Turkish economy in 2013,” I wrote that despite the difficulty of predicting growth in 2013, I was rather confident regarding the 4 percent target announced in the official Medium-term Economic Program (OVP). I would like to remind readers that I was not alone in thinking that, and there was a very large consensus among international organizations as well as national ones regarding better growth prospects for this year. This confidence originated from decreasing interest rates, which are normally capable of reviving sluggish domestic demand, though I had expressed some reservations and had questioned the uncertain reaction of Turkish households to the decreasing interest rates. However, my criticism was not about the 4 percent growth forecast based on domestic demand but rather on the expectation of the government and the central bank of a continuation of the current account deficit decline in 2013 similar to 2012. Now, seeing some advanced indicators of growth for December and January, I am wondering if we have to reconsider our growth forecasts for 2013. I should admit that the decrease in industrial production in December increased my concerns about the revival of domestic demand. Indeed, in December we observed a sizable decrease particularly in the production of consumer durables, which are in fact more sensitive than other goods to a decrease of interest rates. One can say that it is maybe too early for the decreasing interest rates to affect the demand for consumer durables since there is always a time lag before the decrease has an impact. Nevertheless, I must point out that the decline in interest rates is not a recent event. I think that we have some good reasons to be alarmed. Let's examine more closely the signals given by different advanced indicators. The consumer confidence index has been on a path of growth for two months now: It increased by 4.4 percentage points from November to January. This increase in confidence is consistent with the consumer credit expansion that reached a yearly average growth of 20 percent. Let me remind readers that this expansion is considered by the central bank to be more than sufficient since the bank is targeting keeping the yearly consumer credit expansion at around 15 percent for the sake of its disinflation policy. However, firms are not as optimistic as consumers. The real sector confidence index lost 2.4 percentage points from November to December. The seasonally adjusted capacity use in the manufacturing sector, another advanced indicator, decreased in January from 73.6 percent to 73.1 percent compared to December. This decrease is also consistent with the decrease in real sector confidence. Let me also add that exports also seem to have lost their momentum; the seasonally adjusted growth rate of exports decreased by 2.8 percent from October to November, but imports increased slightly by 0.4 percent. So the signals of domestic demand are in opposite directions, and the signals on the foreign trade front are not encouraging. Certainly, we should at least wait for January's statistics before getting a clearer picture of the state of growth. That said, I think the available information summarized above is enough to allow me to express some reflections on an important consequence of low growth. Further loosening monetary policy would risk jeopardizing the 5 percent inflation target. If the Central Bank maintains its actual stance, the already existing signals of an upturn in unemployment would become more perceptible. This will increase, for sure, the political pressures on the central bank's management.