OECD forecasts low growth for Turkey

I hesitated between two subjects for today’s article. After a long period of deliberation, the draft of a new income tax law was finally submitted to Parliament on Wednesday.
On the same day, the Organization for Economic Cooperation and Development (OECD) published its new forecasts for the Turkish economy. I think it would be better to first talk about the OECD forecasts despite the importance of the tax reforms. This issue can wait until Tuesday, all the more so since we will be discussing it passionately in the coming weeks. Ali Babacan & Zafer Çağlayan: Prudence versus audacity According to the OECD’s “Turkey - Economic forecast summary (2013)”: “Following weak growth in 2012, as consumption and investment contracted and offset a surge in exports, the economy is now regaining momentum. Growth is projected to rise to above 3% in 2013 and, as the global recovery gathers strength, to pick up to 4½ per cent in 2014. Inflation and the current account deficit both remain above comfort levels, however.” I agree with the gist of this statement. But as usual, the devil is in details so, let’s look at them. The OECD’s growth forecast for Turkey this year is 3.1 percent. The first item to note is that the growth rate is well below the 4 percent targeted in the government’s Medium-term Economic Program (OVP). If growth remains at this level -- and I think that this is a rather realistic forecast -- the actual debate on monetary policy will become heated. The official growth target of 4 percent was already not well received by some ministers. The existence of contradictory approaches to monetary policy within the Justice and Development Party (AK Party) is not a state secret. Those partial to a push on the gas pedal continue to claim that interest rates are still high, despite the central bank’s recent reduction. It is worth reiterating that the expected real interest rates are currently in the negative zone, and this situation is currently considered by certain economists, including myself, as a potential risk for inflation and savings. I would like to note that there is dangerous confusion regarding the monetary policy. As is clearly expressed in the last Monetary Policy Committee (PPK) statement, lowering the interest rates is aimed at preventing further appreciation of the lira, which is already slightly overvalued, by discouraging excessive short-term capital inflows. At the same time, the central bank is trying to control credit expansion by squeezing the money supply in order to prevent an uncontrollable increase in domestic demand. This policy approach does not satisfy the proponents of acceleration. They demand an aggressive loosening of monetary policy. The low growth perspective is central to this opposition within the AK Party. If the debate has not yet turned into an open fight, this is because despite low growth, unemployment is not growing too fast. I have explained many times before in this column that this fortunate state of events is due to the high job creation capacity of growth prevalent in recent years. I do not think that this good fortune will continue in the near future. The OECD’s recent report forecasts an increase in the unemployment rate from 9 percent in 2012 to 9.4 percent in 2013. I believe that this forecast can be seen as a rather optimistic one. Another question mark regarding the OECD’s forecast is related to the current account deficit (CAD). The OECD thinks that exports of goods and services will increase by 4.9 percent and imports by 3.3 percent in 2013, causing a modest increase in the current account ratio to gross domestic product (GDP) that would reach 6.2 percent in 2013, up from 6 percent. I also consider this forecast rather optimistic. Yesterday, the Turkish Statistics Institute (TurkStat) published April’s foreign trade statistics. Seasonally adjusted exports had decreased by 1.6 percent compared to March, while imports had increased by 10.7 percent. Even if we exclude imports of gold, which showed a sudden jump in April, the growth rate of imports still remains high at 6.6 percent according to Bahçeşehir University’s Center for Economic and Social Research’s (BETAM) estimate. This is not a good sign for the CAD. As I already pointed out, the Turkish economy seems to be trapped in a low, unbalanced and poor quality growth regime. Even if GDP growth accelerates, as forecasted by the OECD, in 2014, this will be based mostly on domestic demand, further widening the current account deficit, as noted by the OECD. To sum up, it is quite probable that the GDP will remain below 4 percent in the future, causing a higher unemployment rate and CAD than expected. This state of affairs will be unacceptable for the AK Party government as the elections marathon will kick off soon.