In my Oct. 11 column “How is the Turkish economy going?” I claimed: “The Turkish economy is not going very well. But there are also some reasons to be optimistic.”
My concerns were focused on two points: first, the ongoing unbalanced growth that is increasing the current account deficit, and second, the lack of political will or ability for structural reforms. As for my optimism, it was based on the decisiveness of the Justice and Development Party (AK Party) government on fiscal discipline before elections. The latest economic indicators for the third quarter allow us to renew our assessments on the state of the Turkish economy.
In October, the International Monetary Fund (IMF) particularly criticized Turkey's monetary policy, claiming that it was not tight enough to confront the risk of capital outflows. The IMF also suggested that fiscal policy should be tightened further, particularly through better control of public expenditure. I wrote that I agree, as does the government, on the control of public expenditure, but disagree with further tightening of the monetary policy. The logic behind this double tightening defended by the IMF is that if macroeconomic imbalances such as a large current account deficit are not fixed in time, the risk of severe changes in the exchange rate, which could provoke a recession, will dramatically increase.
The Turkish Central Bank did not follow the IMF's advice and maintained its policy rate at 4.25 percent while it continued to use so-called unconventional tools such as day-to-day management of interest rates, reserve option mechanisms and credit controls to fight inflation and at the same time achieve balanced growth. One month later, ongoing developments in the Turkish economy seem to prove the Turkish Central Bank correct.
Let's start with the growth rate. Industrial production increased by 1 percent from the second quarter to the third. Although the increase from the first quarter to the second has been higher, at 1.4 percent, one should underline the continued growth. Bahçeşehir University Center for Economic and Social Research (Betam) estimated, in its recent Economic Outlook, the growth rate of gross domestic product (GDP) from the second quarter to the third at 1.3 percent and the yearly growth rate at 5.1 percent. Actually, growth over 4 percent for the whole year would not be surprising. Let me recall that the Medium-term Economic Program (OVP) forecast GDP growth at 3.6 percent.
The critical aspect of this good growth performance lies, of course, in its character. I have reported the debate about “balanced growth” many times, but let me briefly reiterate. Last year, 2012, was the year of “rebalancing” -- i.e., turning the net exports contribution (exports growth minus import growth) to growth from negative to positive. The rebalancing succeeded, since the net exports contribution became positive, but nonetheless domestic demand stagnated, bringing the growth rate down to as low as 2.2 percent. In the first half of this year the growth rate increased to 3.7 percent thanks to a resurgence of private consumption, but at the same time, the net exports contribution became negative while the current account deficit started to rise again.
Betam's last forecasts regarding the third quarter show a possible comeback for balanced growth. Indeed, according to Betam, the increase in exports of goods and services may have reached 2.9 percent in the third quarter, while imports might have decreased by 4.2 percent. This would mean a clear positive contribution from net exports to growth. Now, exports of goods and services had decreased by 1.7 percent from the first quarter to the second while imports had increased by 6.3 percent. It is true that the current account deficit is increasing, and the deficit over the GDP would have reached 7.2 percent in the third quarter from its level of 6.7 percent in the second quarter. However, one must note that this increase is almost wholly caused by gold imports. The gold inflows will probably become outflows in the future, as was the case in the past.
We do not know yet if this rebalancing will persist in the future. This will depend, essentially, on two things: the value of the Turkish lira and the development of domestic savings. Do not forget that a tighter monetary policy risks the lira's appreciation, which might in turn jeopardize balanced growth.