Assessing the state of the Turkish economy

Last week Bahçeşehir University's Center for Economic and Social Research (Betam) published its latest “Economic Outlook and Forecasts” report, and yesterday, the Turkish Statistics Institute (TurkStat) released its 2013 labor market figures.
We are now in a position to make an accurate assessment of last year's employment figures and make the first comments for this year based on the recently published indicators by Betam. Overall, 2013 was a fairly good year, both in terms of economic growth and the continued decline of the current account deficit. However, unemployment increased – albeit only to a limited extent -- while some difficulties can be seen on the horizon for 2014. Betam did not change its 2013 prediction of economic growth, maintaining it at 4.2 percent. TurkStat will publish gross domestic product (GDP) statistics in March, but it is almost certain that the growth rate will be very close to 4 percent. This is rather a good achievement, all the more so because the economic growth will have been achieved without jeopardizing the current account deficit. The last point may seem controversial, since the current account deficit was expected to increase from just over 6 percent at the end of 2012 to 7.9 percent by the end of 2013, according to Betam's forecast. However, when one excludes imports of gold and exports from foreign trade accounts, the picture becomes very different. The fact that this decrease would be obtained while there is an increase in economic growth, from 2.2 percent in 2012 to around 4 percent, should be emphasized. This is proof that the increasing growth has been fairly balanced since the gold trade is not related to the contributors of economic growth like domestic demand and net exports. If the achievement is repeated this year, one can conclude that the Turkish economy is still capable of growing, but moderately; meanwhile, the current account deficit will steadily diminish. Developments in the labor market are not as positive as economic growth figures. According to November figures, the nonfarm labor force increased approximately by 600,000 and nonfarm employment by 450,000 from the previous year. As result, the nonfarm unemployment rate increased slightly from 11.7 percent to 12 percent. As for the seasonally adjusted figures, they show a stagnating rate at 12.1 percent. Those figures suggest that the Turkish labor market is on the way to normalization -- meaning, the period of strong increases of over 1 million per year for both labor force and employment has finished. Economic growth still continues creating a lot of jobs, but labor productivity has finally started going up. In 2012 employment increased by 3 percent while GDP grew only by 2.2 percent. When the final figures for 2013 are released, employment is expected to have risen by around 2.5 percent with GDP growth will be around 4 percent. I would like to add to this picture that the labor force participation rate (labor force by working age population) decreased from a high of 51.2 percent in April 2013 down to 50.7 percent in November of the same year. The growth performance as well as the decline in unemployment this year will be dependent on three major factors: the value of the Turkish lira, the changes to monetary policy and the future direction of the current political uncertainties. The high depreciation the Turkish lira suffered in recent months due to the US Federal Reserve's monetary policy and the adverse effects of the Dec.17 corruption scandal on the economy will probably cause negative growth from quarter to quarter. The first leading indicators seem to confirm this prediction: Capacity use in manufacturing as well as consumer confidence dropped in January. Loan interest rates continued to rise given interest increases decided by the Central Bank of Turkey. At the moment they stand at 12-14 percent, while inflation expectations are around 8 percent. One can easily predict that tight monetary policy will be maintained throughout 2014 because inflation is well over the target of 5 percent. As for the political uncertainties, they are not going away any time soon. Given this outlook, I expect economic growth to be well below 3 percent this year. Even though economic development will be balanced -- the current account deficit will still be narrowing -- unemployment will go up. I do not think that this mediocre economic outcome will satisfy the rulers of the Justice and Development Party (AK Party).