 TurkStat estimated a yearly growth rate at 2.2 percent.
This is lower than the earlier forecasts that varied around 2.5 percent.
One year ago, economists were intensely discussing whether the Turkish
economy would experience a soft or hard landing. Everybody agreed that a
landing of some kind was imminent since the domestic demand-led growth had
reached its limit along with a very high current account deficit
(CAD)-to-gross domestic product (GDP) ratio at 10 percent. To avoid the
risk of a sudden cessation of capital inflows and a strict exchange rate
adjustment -- which necessarily would have followed the sudden stop -- the
government and central bank had decided to cool domestic demand and push
the exports in order to have a relatively lower but balanced economic
growth.
This new approach represented the soft landing scenario.
A Medium-term Economic Program (OVP) for 2012 was projecting a 4 percent
growth rate, into which net exports as well as a modest domestic demand
would contribute more or less equally. During the first month of 2012, I
thought like most of my colleagues, that a soft landing was possible. But
when spring came, I had already joined the pessimistic camp, asserting that
the growth would be lower than planned. In the summer, I wrote many times
in this column that I expected a growth rate of lower than 3 percent. We
now have a much lower one. We must admit that the landing has been hard
rather than soft.
What happened? Simply, domestic demand has declined more
than planned. Indeed, private consumption decreased by 0.7 percent and
investments by 4.5 percent. Despite the positive contribution of public
expenditures, the domestic demand over all contribution stayed negative. The
bad performance of the fourth quarter has to be particularly noted.
TurkStat estimates the quarter-to-quarter growth rate at 0 percent.
Consumption and investments pursued their decreasing path during the fourth
quarter. This means that the loosening of monetary policy did not produce
the expected impact on the revival of domestic demand. The hopes are now
postponed to the first quarter of this year.
The OVP still forecasts a balanced growth rate of 4
percent this year. The government and Central Bank expect the continuation
of the positive contribution of net exports but also, contrary to last
year's disappointment, a positive domestic demand contribution as well.
Will it be possible? I am afraid that this time we risk coming back to our
standard growth regime; that is, a domestic-led growth instead of a
balanced one. Advanced indicators of the first three months point out a
timid revival in domestic demand. Given the delayed impact of the easing of
the monetary policy and the expected positive impact of the new investment
incentives implemented in June 2012, I am rather optimistic about domestic
demand revival, but not about the positive contribution of net exports.
During the first two months of this year, when foreign
trade figures are seasonally adjusted, the cumulative increase of exports
of goods during January and February shows a limited increase at 2.7
percent compared with the last two months of 2012, while imports show a
high increase of 10.5 percent. These figures are not a good omen for the contribution
of net exports to the GDP this year; if the gap between export and import
increases persists, the contribution of net exports will be negative, for
sure. The fact that the European market, still being the principal
destination for Turkish exports, has stayed in a recession, does not give
us too much hope for exports. They can continue growing in other markets,
as they did last year, but it is not guaranteed that the total increase in
exports can still surpass the increase of imports, as was the case in 2012.
I think the targeted 4 percent growth is still
attainable, but it will not be a balanced one, for sure. Reaching 4 percent
growth will depend on the intensity of the revival in domestic demand. The
main handicap would be the possible ineffectiveness of the monetary policy.
Monetary policy seems to be reaching its limit and I do not believe that
further easing is possible. Thus, only fiscal policy remains. Nevertheless,
fiscal discipline continues to be the red line for the government, given
the persistent declarations of Deputy Prime Minister Ali Babacan and
Finance Minister Mehmet Şimşek about the virtues of low budget deficits.
But in politics, flexibility can overcome principles when elections are at
stake.
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