Turkey continues to grow pretty well

The third quarter growth statistics revealed by the Turkish Statistics Institute (TurkStat) on Tuesday showed that the economy continued growing but, more importantly, that growth had became more balanced, or less unbalanced, if you prefer. The annual growth rate reached 4.4 percent in the third quarter while the seasonally adjusted quarterly growth rate was estimated to be 0.9 percent, making it 3.6 percent when annualized. Those growth rates are higher than both market and government expectations. The prime minister thus did not miss the occasion to show his jubilation. Moreover, the contribution of net exports changed from negative during the first two quarters to positive in the third quarter. I was expecting such an improvement: I had written in this column on Nov. 15 (“Recent developments in Turkish economy”) that the advanced indicators of the third quarter allowed me to be moderately optimistic. I had also noted that Bahçeşehir University Center for Economic and Social Research's (BETAM) forecast pointed to a “possible comeback for balanced growth.” However, it would be too early to declare a victory on the economic front. Since the devil is in the details, let me go through the details of the third quarter growth performance. When the quarterly changes of the expenditures composing the gross domestic product (GDP) are seasonally adjusted (see BETAM's last quarterly research brief on economic growth), we observe the following particularities regarding the growth performance from the second quarter to the third quarter. The biggest contribution to growth came from private consumption. It increased by 1.5 percent and contributed 1 percentage point (PP) to quarterly growth. This appetite for consumption allowed firms to liquidate their inventory which had attained excessive levels in the second quarter. So, the destocking also contributed positively to growth. Maybe it would have been preferable to have less appetite for consumption and more willingness for saving but in the days of low growth, this is better than stagnating consumption. That being said, there is some good news: Private investments continued to increase, contributing 0.5 pp while the contribution of net exports was also positive at 0.7 pp. This was not the case in the first two quarters. However, exports fell by 2.6 percent compared to the previous quarter and this positive contribution was obtained by a higher decrease in imports (minus 4.7 percent). This is not promising for the future. The most striking and somehow surprising aspect of the third quarter growth is the harsh halt on public expenditures. Indeed, public expenditures declined by 6.6 percent compared to the previous quarter, lowering the growth rate by 1 pp. Both public consumption and investments decreased but the decrease in public investments was quite high. Public investments had also decreased in the second quarter, by 0.8 percent, but this decrease was much more moderate. Clearly, the budget deficit this year will be much lower than the planned deficit, probably lower than 2 percent. No doubt, the government has firmly decided to stick to its fiscal discipline despite the approaching elections. One can also consider this break very harsh in terms of growth. Nonetheless, it constitutes an important anchor for macroeconomic stability while the current account deficit (CAD) is still high, over 7 percent. I expect a growth rate of around 4 percent this year. This performance would be better than the forecasted 3.6 percent of the Medium-term Economic Program (OVP). This will makeTurkey a high-growth country compared to EU countries and some emerging countries. But what can we say about the future? Repeating this performance next year will basically depend on better export performance while imports, excluding gold, must continue to moderately increase. This seems the case actually. But we do not know yet if a structural change is under way or if this is just a temporary situation. As for exports, the Turkish industry has to progress more rapidly in the value-added chain. Economy Minister Zafer Çağlayan presented on Thursday important research conducted by his ministry about the links between R&D, patents, trademarks, etc. and export performance. I will come back to the results of this research on Monday, but would just like to note that among 83,000 exporting companies, three out four are neither spending a cent on R&D nor do they possess a single patent or trademark.