Long term growth perspectives for Turkey

Today low growth is a hot debate with regard to the Turkish economy. It has also been the most debated subject in this column. We do not yet know to what extent the growth rate will decline this year.

The forecasts range from less than 2 percent to more than 4 percent. My own estimation is around   3 percent. Obviously, this range of growth is not enough from a perspective of social cohesion. With such low growth Turkey cannot overcome the unemployment and poverty that are still quiet high despite the improvements of the last decade. But one year of low growth does not necessarily mean low growth for the long run. So, what about the long-term growth perspectives? The recent Organization for Economic Cooperation and Development (OECD) report on Turkey (OECD Economic Surveys: Turkey 2012) asked the question and gave a comprehensive answer. The OECD suggests a baseline growth scenario and extends it to provide some additional   assumptions. Let's first consider the baseline scenario. According to the OECD, average gross domestic product (GDP) growth would be 4.4 percent from 2012 to 2030. This forecast is based on three basic assumptions: 1- Educational attainment will continue to converge with the average for OECD countries, and the average number of years of schooling of the working age population will increase from 7 to 8.5 years. 2- Taking into consideration the actual pension system, the increasing educational level (see above) and the population trend, labor force participation (the share of employed and unemployed people in the working age population) will reach 55 percent instead of the current 49 percent. Let me point out here that with 55 percent in 2030, Turkey will continue to be among the countries having the lowest labor force participation rates. 3- Assuming efficiency-enhancing product market reforms, such as increasing competitiveness in the energy sector, average multi-factor productivity (MFP) growth will stay at 1.5 percent a year from 2012 to 2030. So, out of 4.4 percent growth, roughly 3 percent will come from the contributions of capital stock, human capital (increase in education level) and the increase in the   labor force, assuming that actual unemployment, which is slightly above 9 percent, remains unchanged. Education does matter a lot for growth I agree with this baseline growth scenario except for the capital stock contribution. I do not want to go into technical details but just to remark that the OECD model took for the capital stock contribution share the average of developed countries, which is 0.3, while estimations for Turkey are about 0.5. Assuming this last figure and also a lower MFP growth, I estimated the long run average growth for Turkey, albeit for a shorter period, to be about 5.5 percent in “Büyüme sorunu ve reform ajandası” (Growth problem and the reform agenda), Türkonfed, June 2012). Given the decrease in both capital contribution and employment contribution in a longer period, the average growth would definitely be less than 5 percent during the considered period if the assumptions above are accepted. What does this growth perspective mean, regarding the very ambitious official 2023 targets set by the Justice and Development Party (AK Party) government for the centenary year of the republic: Per capita income will double from $10,000 to $20,000, Turkey will climb to the 10th rank among the biggest economies and unemployment will decline consistently. (I do not remember if a figure had been announced.) Let me start with unemployment. As I mentioned above, the baseline scenario assumes stagnation in unemployment. Indeed, if the MFP is kept as high as 1.5 percent and the assumptions about the trend of population increase and the rather low participation rate are valid, an average growth under 5 percent would not be sufficient to create enough employment to absorb the increase in the labor force. As for per capita income, calculations show that by 2030, but not by 2023, it will roughly double -- assuming an average of 0.8 percent (currently 1.25 per cent) for the population increase and 4.8 per cent for GDP growth. Anyway, so far is so good. However, becoming the 10th largest economy worldwide by 2023 has to be forgotten. At best, Turkish GDP will rise to $1.8 billion by 2030 -- assuming that growth is at least 4.8 percent. This level will allow Turkey to outpace Holland and maybe Spain, if this county is trapped in very low growth for a long time. To be ranked 10th or 16th, frankly I do not care as long as we are a member of the G-20. Is better growth performance possible? The response of the OECD is positive. If the 12 years of compulsory education recently legislated is fully implemented, the average schooling will reach 9.5 years instead of 8.5, and this will add 0.8 percentage points to the average growth through the increase of human capital productivity. Furthermore, if “deeper labor market reforms,” such as severance pay reform, decentralization of the minimum wage and the measures suggested by the National Employment Strategy (NES) that encourage woman to work, are fully implemented, another 0.6 percentage points would be added to the growth rate. So, Turkey can have an average GDP growth of 5.8 percent until 2030 if radical reforms are implemented in the labor market and in education. Needless to say, a democratic constitution as well as the end of violence with regard to the Kurdish problem will help to achieve these reforms. But anyway, this also requires that the ruling AK Party focus its political energy on economic reforms instead of who is going to become the president in 2014.

Austerity policies in jeopardy

Last week different events from the five eurozone countries painfully tackling their debt crisis showed the increasing difficulties in implementing the austerity programs set by the Troika -- the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF).
Finnish Finance Minister Jutta Urpalainen and PASOK leader Venizilos Let's scrutinize them, starting with Greece, the most indebted, as well as the most rebellious to the Troika's austerity plans. The Troika offered Greece a bailout loan worth 360 billion euros, an amount bigger than its gross domestic product (GDP), until 2014 as part of a very severe belt-tightening program that includes wage cuts, firings from the public sector, cuts in welfare spending and market reforms aiming to open protected professions, such as taxis drivers and pharmacists, to competition. The objectives were aimed at achieving a balanced budget and a competitive economy in 2014. Though George Papandreou's PASOK government had barely started to apply the austerity program, Greeks strongly resisted it, provoking two general elections within a year. Unsurprisingly, delays occurred in the implementation of the austerity program, and it is now clear that the budget deficit target of 5.4 percent for this year will not be reached. Indeed, the problem is not with the delays, though each year of delay requires an additional injection of 50 billion euros, but the inability of Greece to implement the austerity program. The Troika is ready to allow for an extension of the program despite its cost, but not a compromise. IMF spokesman Gerry Rice, during a press conference last week, excluded any renegotiations but said that the fund was open to discussion “if there are ideas how to better achieve those objectives.” On Wednesday, officials from the government of Prime Minister Antonis Samaras will meet with Troika representatives with the hope of reversing some unpopular measures while the Troika will ask Greece how they plan to save 11.5 billon euros by 2014. I expect a political crisis -- another one -- since the Democratic Left (DIMAR) who barely supported Samaras' government and with the promise of loosening austerity measures, will probably break with it. Portugal has been considered, until recently, the model student of austerity programs, but this might be a bygone era. The center-right government of Pedro Passos Coelho had already cut wages and spending on over-indebted hospitals and had aimed to achieve a budget deficit of 4.7 percent, which was close to 10 percent in 2010. But like in other similar cases, the Portuguese economy will contract more than expected, and the austerity measures already in place will not be sufficient. But what is really new in Portugal is the increasingly popular resistance to the austerity measures. Doctors went on a two-day strike last week. Moreover, the constitutional court canceled the public sector wage cuts, arguing that they conflict with the principle of equal treatment. The government responded by saying it would proceed to cut wages in the private sector as well. Another model student, along with Portugal, was Ireland. Following the collapse of its banking system because of mortgage madness, the Irish state had an abyssal budget deficit of 30 percent. The Troika provided Ireland with 85 billon euros, approximately half of its GDP, in bailout funds as part of a drastic austerity program with the same belt-tightening measures as Greece. The austerity measures were so drastic that the deficit decreased by 10 percent, though the public debt to GDP ratio was still increasing; it is expected to reach 120 percent in 2013. But the bad news is that the growth prospects of the Irish economy are bleak because of the European recession as it is heavily dependant on exports. Currently, the Irish are getting ready to ask for the same privileges that are accorded to Spain, who is facing similar difficulties -- a banking system that is about to collapse under the burden of unpaid mortgages. Recently, German Chancellor Angela Merkel was obliged to accept that European funds had to be used directly to support Spanish banks in order to avoid further increases in the sovereign debt, so the Irish demands are perfectly legitimate. The case of Spain is well known as it has been on the front pages over the past few weeks. The center-right government of Mariano Rajoy came to power promising sweat and pain, but his homemade austerity program faces an increasing resistance, and it is uncertain if they will be successful given a more severe recession than was expected. The short-term debt of Spanish banks with the ECB has already reached 340 billon euros, and experts say more will be needed. The Spanish sovereign debt interest rates are around 7 percent, showing the weak confidence of financial markets. Obviously, the situation cannot last. The case of Italy differs on two important fronts. It is colossal, and it has the second biggest public debt after Greece, but it has a low budget deficit (less than 3 percent). Despite this, it faces, like others, very bad growth prospects. The IMF forecasts a 1.6 percent contraction of its GDP this year. Prime Minister Mario Monti succeeded in enforcing some structural reforms, but these need time to help growth and it is also unclear if they will be sufficient, as noted by Moody's. The rating agency downgraded Italy by two notches last week, from A3 to Baa2, arguing that Greek and Spanish risks had increased and were contagious. Let me finish this parade of facts and events with a very symptomatic one regarding future possible developments in the eurozone: Finnish Finance Minister Jutta Urpilainen declared that “Finland would consider leaving the eurozone rather than paying the debts of other countries in the currency bloc.” And Monti responded to her by saying that such “irresponsible sentiments push up Italian interest rates.”

2. Çeyrek daha umut verici

Yılın 1. çeyreği itibariyle büyümeyi değerlendiren geçen haftaki yazımda öncü göstergelerin 2. çeyrekte daha iyi bir büyüme performansı vaat ettiğini belirtmiştim.  Hafta başında açıklanan Mayıs sanayi endeksi bu görüşü doğruladı. Dış ticaret miktar endeksleri ise daha karmaşık sinyaller veriyor. Hatırlayalım, TÜİK 1. çeyrekte yılık büyümeyi yüzde 3,2, çeyrekten çeyreğe mevsim ve takvim etkisinden arındırılmış (MTEA) büyümeyi ise – 0,4 olarak belirlemişti. Son veriler ışığında 2. çeyrek değerlendirildiğinde çeyrekten çeyreğe büyümenin pozitif çıkacağı anlaşılıyor.

            İmalat sanayi üretim endeksi Nisana kıyasla Mayısta (MTEA) yüzde 0,8 arttı. Alt kalemlerdeki gelişmelerden büyümenin talep yönüyle ilgili ipuçları elde etmek mümkün. TÜİK alt kalem endekslerini mevsim etkisinden arındırmadığından yıllık değişimlerin temposuna dayanmak zorundayız. Rakama boğmamak için ayrıntılara girmiyorum. Son üç ayın yıllık değişimleri özetle şunu söylüyorlar: Dayanıklı tüketim mallarındaki durgunluk devam ediyor. Örneğin Betam Binek Otomobil üretiminin(MTEA)  Nisan ve Mayısta 1. çeyreğe kıyasla ortalama yüzde 8 civarında düştüğünü tahmin ediyor. Otomotiv sektörü temsilcilerinin ÖTV indirim konusunda lobiye başlamaları rastlantı  değil. Buna karşılık dayanıksız tüketim malı üretiminde, özellikle de sermaye malı üretiminde belirgin bir canlanma var.

İç talepte canlanma

            Bu manzara iç talebin 2. çeyrekte büyümeye hatırı sayılır bir katkı yapacağını gösteriyor. Nisan ve Mayıs verileri net ihracatın da büyümeye pozitif katkısının devam ettiğini söylüyor. 1. çeyrekte bu katkı 4,5 yüzde puan gibi çok yüksek bir düzeydeydi. 2. çeyrekte katkının önemli ölçüde azalmasını bekliyorum. Bu iyi haber değil. Umarım yanılırım. Mayısta dış ticaret miktar endekslerinde bozulma görüldüğünün altını çizmek istiyorum.

            2. çeyrekte ve yılın tümünde ne düzeyde bir büyüme beklemeliyiz? Betam bugün yayınladığı Ekonomik Konjonktür notunda 1. çeyrekten 2. çeyreğe (MTEA) büyümeyi yüzde 0,6, yıllık büyümeyi de 2,3 tahmin ediyor. Yıllık büyümenin yüzde 3,2’ye kıyasla düşük kalması baz etkisiyle ilgili. Geçen yıl çeyreklik büyüme yüzde 1,3 olarak gerçekleşmişti. 1, çeyrekten 2.çeyreğe şahsen yüzde 1’e daha yakın bir büyüme tahmin ediyordum. Betam’ın 0,6’lık tahmini içerde epey tartışıldı. Sonuçta tahmin denklemlerinin matematik sonucunu olduğu gibi yayınlamaya karar verdik. Tabi bu bir tahmin ve zaman zaman önemli yanılmalarla karşılaşıyoruz. Kendi adıma konuşayım. Bana öyle geliyor ki, iç talepte kısmi bir canlanma dış talepte ise durulma yaşanıyor. Bu böyle devam ederse hem yıllık büyüme yüzde 3 civarında kalır hem de cari açıktaki iyileşme durur.

Hararetli tartışmalar

            Böyle bir gelişme sert inişçileri boşa çıkartır ama yumuşak iniş de olmaz. Hanidir dillendirdiğim tipik bir tatlı sert iniş gündemde. Hem büyüme düşük kalır, hem de cari açıkta belirgin bir düzelme hevesimiz kursağımızda kalır. Bir diğer sorun da işsizlik cephesinde kendini gösterecektir. Düşük büyümenin istihdam üzerindeki etkisi tam olarak kendini henüz göstermedi. Mart dönemi işgücü piyasası rakamları işsizlikte azalışın durduğu sinyaline vermişti. Gelecek hafta Nisan dönemi rakamları yayınlandığında düşük büyüme etkisinin biraz daha belirginleşmesini bekliyorum.

            Hükümet ve kamuoyu düşük büyümenin sonuçlarını  algıladıkça para ve maliye politikalarının gevşetilmesi yönünde baskıların da artması çok muhtemel. Hararetli tartışmalara hazır olalım.

The unpleasant low growth perspective

SEYFETTİN GÜRSEL s.gursel@todayszaman.com According to the Turkish Statistics Institute (TurkStat), the Turkish economy grew by 3.2 percent on a yearly basis in the first quarter. For the sake of comparison, let me highlight the fact that the yearly growth rate was above 11 percent in the first quarter of 2011 and above 5 percent in the last quarter.
Moreover, TurkStat estimated the quarter to quarter seasonally adjusted growth rate as minus 0.4 percent. Although current leading indicators predict a much better growth performance for the second quarter, the Turkish economy is obviously facing a deceleration of growth. Is it a transitory phenomenon? I do not think so, even if it is true that there is a base effect because of the significant growth in the first quarter of 2011. To understand if the low growth is transitory or not we should analyze the sources of growth. Private consumption, which constitutes the largest share of gross domestic product (GDP) with 70 percent, stagnated. Therefore, it did not contribute to growth at all. Private investment increased by a mere 1.6 percent, while the public sector grew by 5 percent. The contribution of domestic demand to growth remained less than 1 percentage point. Given this very weak domestic demand, firms reduced their stock, and this resulted in a contraction of 2.3 percentage points. So, the growth rate of 3.2 percent resulted mainly from net exports: Indeed, exports increased by 13 percent, while imports decreased by 5 percent. Therefore, the contribution of net exports to growth has been 4.5 percentage points. To know whether this relatively low growth -- around 3 percent -- will be there for a long time, we have to answer two questions: First, is there some room to increase domestic demand without jeopardizing the current account deficit (CAD) and inflation targets? Second, can net exports' contribution to growth be made permanent? My answer to the first question is “Yes, but not that much.” Regarding inflation we can say that Central Bank of Turkey stays in a relatively comfortable situation thanks to decreasing energy and food prices. Its forecast for the year end, set in the first quarter, is 6.5 percent but Governor Erdem Başçı announced recently that this figure could be lowered very soon. Moreover, last Friday we witnessed a decrease in interest rates by the Central European Bank as well by the Bank of England. So, the Turkish Central Bank has some room to relax its tight monetary policy to some extent, but there are limits to this: The inflation target is set at 5 percent, and there is still a long way to go to arrive at this rate. Too low interest rates can trigger capital outflows, causing exchange rate shocks; TL depreciation is not good news for inflation. Too low interest rates could also trigger a new consumption boom, pushing up prices. To sum up, I think the possibility of giving a push to the domestic demand via monetary policy is limited. Let me highlight that last Friday Governor Başçı pointed out that it is too early to consider changing their position and that they will wait to see the second quarter growth figures. The other possibility could be loosening fiscal policy. But we should note that a loosening is already on the way to some extent since tax revenue is decreasing along with decreasing growth, while public expenditure is continuing to increase. The budget deficit will probably be a little bit higher than last year, (my estimation is 2.5 percent instead of 1.5 percent), but this is the limit which must be respected. If not, as Deputy Prime Minister Ali Babacan likes to say, expectations could worsen, causing adverse effects on investments and market interest rates. If there is only limited room to increase domestic demand, what about exports? Two points have to be underlined: Global demand conditions, particularly in Europe, are not good, and a deceleration in the increase of Turkish exports has been quite perceptible in the last few months. The leading indicators show that the increase of exports in the second quarter will be less enthusiastic. Even though positive contribution of net exports has to be expected during the next quarters, in the long run this depends on a radical improvement of competitiveness of Turkish industry through lower production costs and extensive innovations. Now, improvement depends on radical reforms in the labor market, in taxation, in education and in the R&D field. For the moment we have just a new incentive scheme and a new trade law. The first one aims to lower labor costs in the least-developed regions, but only for new investments, and also to encourage some import substitution. Let's note that has not yet been implemented. The new trade law aims to improve the functioning of the market economy, but let me note also that last-minute compromises have diminished the effectiveness of the new regulations. However, on the other hand, let me highlight that the regional minimum wage project has definitely been abandoned and the severance pay reform postponed as well as the tax system reform. I believe, as an economist tracking the Turkish economy for quite a long time, that it can grow hardly more than 4 percent in the long term as long as the high growth episodes depend on ephemeral domestic demand booms, which unavoidably hurt the wall of high inflation as well as the high CAD.

The unpleasant low growth perspective

SEYFETTİN GÜRSEL s.gursel@todayszaman.com

According to the Turkish Statistics Institute (TurkStat), the Turkish economy grew by 3.2 percent on a yearly basis in the first quarter. For the sake of comparison, let me highlight the fact that the yearly growth rate was above 11 percent in the first quarter of 2011 and above 5 percent in the last quarter.

Moreover, TurkStat estimated the quarter to quarter seasonally adjusted growth rate as minus 0.4 percent. Although current leading indicators predict a much better growth performance for the second quarter, the Turkish economy is obviously facing a deceleration of growth.

Is it a transitory phenomenon? I do not think so, even if it is true that there is a base effect because of the significant growth in the first quarter of 2011. To understand if the low growth is transitory or not we should analyze the sources of growth. Private consumption, which constitutes the largest share of gross domestic product (GDP) with 70 percent, stagnated. Therefore, it did not contribute to growth at all. Private investment increased by a mere 1.6 percent, while the public sector grew by 5 percent. The contribution of domestic demand to growth remained less than 1 percentage point.

Given this very weak domestic demand, firms reduced their stock, and this resulted in a contraction of 2.3 percentage points. So, the growth rate of 3.2 percent resulted mainly from net exports: Indeed, exports increased by 13 percent, while imports decreased by 5 percent. Therefore, the contribution of net exports to growth has been 4.5 percentage points. To know whether this relatively low growth -- around 3 percent -- will be there for a long time, we have to answer two questions: First, is there some room to increase domestic demand without jeopardizing the current account deficit (CAD) and inflation targets? Second, can net exports' contribution to growth be made permanent?

My answer to the first question is “Yes, but not that much.” Regarding inflation we can say that Central Bank of Turkey stays in a relatively comfortable situation thanks to decreasing energy and food prices. Its forecast for the year end, set in the first quarter, is 6.5 percent but Governor Erdem Başçı announced recently that this figure could be lowered very soon. Moreover, last Friday we witnessed a decrease in interest rates by the Central European Bank as well by the Bank of England. So, the Turkish Central Bank has some room to relax its tight monetary policy to some extent, but there are limits to this: The inflation target is set at 5 percent, and there is still a long way to go to arrive at this rate. Too low interest rates can trigger capital outflows, causing exchange rate shocks; TL depreciation is not good news for inflation. Too low interest rates could also trigger a new consumption boom, pushing up prices. To sum up, I think the possibility of giving a push to the domestic demand via monetary policy is limited. Let me highlight that last Friday Governor Başçı pointed out that it is too early to consider changing their position and that they will wait to see the second quarter growth figures.

The other possibility could be loosening fiscal policy. But we should note that a loosening is already on the way to some extent since tax revenue is decreasing along with decreasing growth, while public expenditure is continuing to increase. The budget deficit will probably be a little bit higher than last year, (my estimation is 2.5 percent instead of 1.5 percent), but this is the limit which must be respected. If not, as Deputy Prime Minister Ali Babacan likes to say, expectations could worsen, causing adverse effects on investments and market interest rates.

If there is only limited room to increase domestic demand, what about exports? Two points have to be underlined: Global demand conditions, particularly in Europe, are not good, and a deceleration in the increase of Turkish exports has been quite perceptible in the last few months. The leading indicators show that the increase of exports in the second quarter will be less enthusiastic. Even though positive contribution of net exports has to be expected during the next quarters, in the long run this depends on a radical improvement of competitiveness of Turkish industry through lower production costs and extensive innovations. Now, improvement depends on radical reforms in the labor market, in taxation, in education and in the R&D field.

For the moment we have just a new incentive scheme and a new trade law. The first one aims to lower labor costs in the least-developed regions, but only for new investments, and also to encourage some import substitution. Let's note that has not yet been implemented. The new trade law aims to improve the functioning of the market economy, but let me note also that last-minute compromises have diminished the effectiveness of the new regulations. However, on the other hand, let me highlight that the regional minimum wage project has definitely been abandoned and the severance pay reform postponed as well as the tax system reform.

I believe, as an economist tracking the Turkish economy for quite a long time, that it can grow hardly more than 4 percent in the long term as long as the high growth episodes depend on ephemeral domestic demand booms, which unavoidably hurt the wall of high inflation as well as the high CAD.