Strong fall in unemployment

According to December labor statistics published by the Turkish Statistics Institute (TurkStat) on Monday, all forms of unemployment decreased significantly.
The annual reduction in the unemployment rate was limited to 0.1 percentage points (from 10.1 to 10 percent) because of a sizable fall in agricultural employment (179,000) while the non-agricultural unemployment rate fell from 12.4 percent to 12.1 within a year thanks to a very strong increase in non-agricultural employment (675,000). The strong performance of employment in the last period (from November to December) greatly contributed to this astonishing annual increase. Indeed, from November to December, non-agricultural employment increased by 159,000 according to seasonally adjusted figures. This is the highest increase observed by far in the last 12 periods. The fall in non-agricultural employment in the seasonally adjusted series was even stronger: It fell by 0.4 percentage points from 12 percent in November to 11.6 percent in December. In fact, seasonally adjusted unemployment had already been falling in November and October though it was on an upward trend for almost a year. I think one can now talk about the changing trend on the unemployment front. Two questions deserve our attention at this point. How do we explain this trend change? Will the fall in unemployment be a long-lasting trend or it is just an ephemeral spring in winter? I am not sure I can provide definitive answers to these questions but I can at least share additional information on this matter and give my personal opinions based on my dedicated experience in the Turkish labor market. First, how can we explain the fall in unemployment in the last quarter of 2013? The two key factors regarding changes in unemployment are gross domestic product (GDP) growth performance and the job creation capacity of this growth -- in other words, the level of growth employment elasticity. Usually, a third factor, a change in the labor force, also matters. But in the Turkish context, the labor force, particularly the non-agricultural one, has quite a stable structural trend to which a cyclical component should be added. In an economic crisis, the labor force grows more than its structural trend, causing strong increases in unemployment, all the more since employment falls during these periods of crisis. On the other hand, during, let's say, normal periods, upward shifts in the labor force depend on employment changes. In other words, mostly employment increases drive labor force increases during these normal periods. So let's focus on economic growth and the job creation capacity. Considering the fact that the impact of growth on employment experiences some time lags, I prefer to focus on the second half of 2013. We know that economic growth accelerated after a mediocre first half. Bahçeşehir University's Center for Economic and Social Research (BETAM) estimates annual growth in the second half to be 4.8 percent. As for non-agricultural employment, it grew by 3.3 percent in the same period. The elasticity of growth to employment (the employment growth rate for 1 percent GDP growth) is close to 0.7 percent. This figure indicates a rather high job creation capacity of growth but it remains in the range observed after the economic crisis of 2008-2009. We know the job creation capacity of economic growth increased significantly in the last few years thanks to strong increases in the service sector, literally populated by women. Let me note that out of the 675,000 net jobs created in non-agricultural sectors, 269,000 were held by women and most of these jobs were created in the service sector. Finally, one can assert that the relatively strong growth in the second half reinforced by high growth-employment elasticity explains quite well the fall in unemployment for three consecutive periods. Will this fall continue? The answer will depend basically on growth performance because I think the high growth-employment elasticity can last several years due to high employment increases in the service sector. Do not forget that the share of the service sector in employment is just over 50 percent, while this share is more than 70 percent in developed countries. So, the critical point is growth performance. In my last few columns I claimed that I expect a low growth rate, around 2.5 percent, this year. The leading indicators of the first quarter confirm this forecast. Nevertheless, we should realize that even in the case of a deceleration in the growth rate, a change in the unemployment trend will take some time.

Where I agree and disagree with Babacan

No way out without reforms Last Monday, in an interview on TV, Deputy Prime Minister Ali Babacan made some important assessments of the hot issues that Turkey is trying to handle.These assessments are worth discussing since they are rather realistic and not pure political propaganda. I saw five major topics in Babacan's assessments: the policies of the Central Bank of Turkey, the state of unemployment and its future in terms of economic growth, the sustainability of the current account deficit (CAD) and, finally, the need for reforms.
Minister Babacan started by saying there is no crisis; thus there is no need for a comprehensive economic package. So we can now stop fretting ourselves by trying to guess what kind of measures may come with the famous “Plan B and Plan C” announced by Prime Minister Recep Tayyip Erdoğan just after the central bank decided to increase interest rates. Erdoğan said last month that an "out of the ordinary" economic package alternative to interest rate hikes could be announced. He added that work on a Plan B or Plan C may be announced in the coming days or weeks. We have heard nothing but rumors circulating about these mysterious alternative plans so far. Regarding monetary policy, Babacan reiterated his support for the unconventional policies of the central bank. He argued that the interest rate corridor instrument (multiple and varying interest rates) had prevented inflows of large quantities of short-term capital. As a result, he said, the impact of the US Federal Reserve's policy and the Dec. 17 corruption scandal on outflows had been mitigated, since there was no great quantity of hot money in Turkey. I agree. This point is often missed in the debate about the central bank's monetary policy. That said, I do not agree with Mr. Babacan when he says that the central bank was not wrong in delaying its interest rate decision. Indeed, the Monetary Policy Committee (MPK) refused to move on the issue during its meeting in January, but it was obliged to increase interest rates a few days later in an extraordinary meeting because investors had started to sell their Turkish Lira denominated assets in a panic, causing a dangerous shift in the exchange rate. Mr. Babacan argued that this panic was due to the serious turmoil that had occurred in Argentina and Russia two or three days after the MPK's meeting. This argument is hardly convincing. Personally, I think the political pressure on the central bank was so stifling that the MPK was not courageous enough to increase interest rates earlier, hoping that this omission would not affect investors' behavior. It was a great mistake. However, I fully agree with Babacan's assessment of the evolution of unemployment. He was right in pointing out that the rate of unemployment had been on an upward path, but that during the last two months of 2013 it leveled off. He added, “It is too early to make a comment, but if we see our growth in gross domestic product [GDP] below 4 percent, then the jobless rates could be relatively higher.” So the critical issue is expected growth this year. On this point, the deputy prime minister was rather cautious. After saying that growth performance will depend both on domestic demand and exports, he indicated that it is still too early to make a projection on domestic demand, but expectations on exports to the EU market are promising. Unlike Mr. Babacan, I am almost certain that domestic demand, particularly demand for investment and durable consumer goods in the first quarter, will be very weak. But Babacan is right to expect that there will be more exports to the EU. Last year, these exports grew for the first time since the eruption of the economic crisis. This year, the EU economy seems to be in better shape. So we can count on exports to the EU market. I wrote in a previous column that my growth-rate forecast for this year is around 2.5 percent. Since then, many other predictions have been published. Even the most optimistic ones do not predict a rate over 3 percent. If these turn out to be correct, the Justice and Development Party (AK Party) will be faced with increasing unemployment and stagnating well-being. The deputy prime minister is certainly aware of this challenge. As he pointed out, the Turkish economy is unable to have 4-5 percent growth without lowering its CAD to a sustainable level. Mr. Babacan thinks that this level might be 4-5 percent, but the deficit must be even lower in the long run. Let me point out that the CAD/GDP ratio is actually over 7 percent. Admittedly, the challenge is a difficult one. This may be the reason why Babacan insisted once again on economic reforms during his interview. The fact that he insisted on reforms shows great virtue in these days of political madness.

Upward signs in unemployment

On Thursday, the Turkish Statistics Institute (TurkStat) released the labor market figures for the June period (May-June-July). All the figures point to an increase in unemployment.
It could be more difficult to find jobs in the coming months The year-on-year change in the unemployment rate has shown a rising trend in the last eight months and the most recent figures confirmed this trend. From June 2012 to June 2013 the overall unemployment rate increased from 8.2 percent to 8.8 percent and the non-agricultural unemployment rate from 10.4 percent to 11 percent. As for the seasonally adjusted figures, which constitute a better indicator of current trends, the overall unemployment rate rose from the periods of May to June from 9.4 percent to 9.6 percent and non-agricultural unemployment from 11.7 percent to 11.8 percent. These increases, albeit limited, could be the signs of a rising trend in unemployment. This is not surprising; on the contrary, this must be considered a return to the norm. Indeed, the low growth trend prevailing in the Turkish economy for almost two years should have caused a rise in unemployment earlier. The growth rate was limited to a mere 2.2 percent last year and for this year, there is a large consensus among forecasters, including Deputy Prime Minister Ali Babacan and Turkish Central Bank Governor Erdem Başçı, that the gross domestic product (GDP) growth will be under 4 percent, probably around 3.5 percent. Those rates can be considered quite high by European standards, but they are insufficient for Turkey to keep unemployment under control given the existence of a strong increase in the labor force. Very surprisingly, the low growth trend in GDP did not produce a significant increase in unemployment until now, thanks to a very high rate of job creation in the non-agricultural sectors, particularly in services. What is striking about the new figures is the rise of unemployment seems to result from a weakening of the job creation process. Indeed, the monthly brief from Bahçeşehir University Center for Economic and Social Research (Betam) on the Turkish labor market shows that there is an important decrease in seasonally adjusted employment in the construction sector (minus 5.6 percent) from May to June. It must be noted that this sector employed almost the same number of workers in June 2012 as in June 2013. This is a sign of a serious economic slowdown in construction. At the moment there aren't clear signs of a resurgence in either domestic demand or exports. The recent rise in loan rates can hardly drop in the context of expectations of diminishing liquidity in the international financial markets, due to the US Federal Reserve's roadmap for progressively ending cash stimulus. To this negative we must add the still-stagnant European market. So, in these circumstances the Turkish economy could be facing even lower growth in the coming months. If at the same time the end of the job creation “miracle” is confirmed, unemployment will start to increase clearly and in earnest. It is significant that Betam's early indicator of unemployment calculated from the Kariyer.net database (the biggest Internet-based job network in Turkey) signals an unemployment increase for July. Until now, the Justice and Development Party (AK Party) government did not suffer politically from the slowdown in growth. The unemployment decrease, which had prevailed since the strong recovery in the aftermath of the global recession, halted, but unemployment did not rise significantly either. In the coming months, in which we will witness the increased tensions of successive electoral campaigns, a rise in unemployment will definitely be a headache for the incumbent AK Party. How can the government respond to rising unemployment? Public expenditure, particularly in construction, can be augmented. There is some room to maneuver on this front, since the budget deficit is quite low (well under 3 percent) and this is also the case for public debt, its ratio to GDP being around 37 percent and on a declining path. However, it should be remembered that the AK Party is a strong believer in fiscal discipline, and the low budget deficit constitutes the Turkish economy's main anchor in the context of a high and rising account deficit. Then, there remains the monetary option. However, it is not certain that the Turkish Central Bank will be able to decrease interest rates in the coming months. One thing is certain: The coming period will be very interesting for political economists.

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.

Limits of monetary policy

The Monetary Policy Committee (PPK) of the Central Bank of Turkey decided to cut interest rates by more than expected during the monthly meeting held on Tuesday. The one-week repo rate (the policy rate) has been lowered from 5.5 percent to 5 percent, while the upper limit of the interest rate corridor (the lending rate) and its lower limit (the borrowing rate) have been cut, respectively, from 7.5 percent to 7 percent and from 4.5 percent to 4 percent. The size of the cuts surprised the business community as well as market players and provoked a hot debate among economists regarding the goals pursued by the central bank and its ability to reach these goals through these strong interest rate cuts.
Governor Erdem Başçı I think there is a large consensus regarding the main goal: The central bank wants to prevent further appreciation of the Turkish lira which has already crossed the red line set by itself. The central bank announced recently that the real exchange rate index would be entering the alarming zone over 120. The index is already there. Moreover, it will certainly be continuing to increase since the Turkish inflation rate is higher than its trading partners. The appreciation of the Turkish lira threatens the so-called “balanced growth” and the financial stability that is so intensely desired by the central bank through losses in the competitiveness of Turkish exports and excessive credit expansion. The following assertions from the MPC release should be underlined: “Recently, there is a reacceleration in capital inflows and credit growth hovers above the reference rate. The committee indicated that, in order to balance the risks on financial stability, the proper policy would be to keep interest rates low while increasing foreign currency reserves via macro prudential measures. Accordingly, it was deemed appropriate to further increase the reserve options coefficients, while delivering a cut in the short-term interest rates.” I fully agree with the central bank on the balanced growth goal. Economic growth exclusively based on domestic demand would unavoidably have an adverse effect on the current account deficit (CAD). The last figures show that the CAD-to-gross domestic product (GDP) ratio, which fell to 6 percent from 10 percent started widening slightly again. So, the desired revival in domestic demand must be kept under control while the supplementary growth must come from net exports. Doing so, exports have to rise more than imports. Now, it is not easy at all to achieve these double goals. Keeping domestic demand under control necessitates a rather tight monetary policy and the pursuit of fiscal discipline. The last cuts in the central bank's interest rates pushed the expected real interest rate in the negative zone; the indicative Treasury Bond rate went down to 5.5 percent while expected inflation remained over 6 percent. I do not think that there is further room for interest cuts. If this happens, credit expansion would be out of control, jeopardizing the credibility of the central bank in its fight against inflation. As for fiscal discipline, it is as solid as a rock according to the latest budget figures; the primary surplus is higher than that of last year in the first quarter. However, the actual macroeconomic framework does not seem to be able to produce growth close to 4 percent, which is targeted in the Medium-term Economic Program (OVP) and constitutes the minimal rate required to prevent unemployment to increase. Let me note that the unemployment rate, at 9.4 percent, is actually 0.4 percentage points over its level of last year. If the growth rate remains weak, admittedly the increase in unemployment will become more apparent and then more threatening for the government as electoral days are approaching. It would be worth noting at this point that the International Monetary Fund (IMF) forecasts only a 3.4 percent growth for the Turkish economy in its latest survey released this week. Balanced and at the same time sufficient economic growth seems quite elusive. The central bank would certainly prefer relatively low growth but sufficiently safe to secure economic and financial stability, while the government prefers robust growth enough to prevent an increase in unemployment. I do not think that the government cares about the source of the growth. This dilemma is capable of creating a serious rift between the central bank and some Justice and Development Party (AK Party) ministers in the coming months. By the way, the split is already quite visible. Mr. Zafer Çağlayan, minister of economy, reacted to the interest rate cuts by saying, “Good, but not enough.”

Huge regional disparities in unemployment

Güvenlik değil yatırım isteyen Mardinliler The Turkish Statistics Institute (TurkStat) published labor market statistics on Wednesday for the year 2012. The unemployment rate decreased from 9.8 percent in 2011 to 9.2 percent. However, I must say that these yearly figures do not bring any new information regarding the evolution of unemployment. I try in this column to regularly inform readers on the state of the Turkish labor market using monthly statistics. We know from those that the unemployment rate climbed slightly since last autumn, partly because of a strong increase in the labor force (the number of people seeking work or employed) and partly because of a deceleration in the increase of employment. Next Friday, we will see if this trend is confirmed or not when the labor market statistics for December are published.
The new pieces of information contained in the yearly statistics are twofold: The first point concerns the distribution of unemployment across regions, and the second the distribution of unemployment among degree holders. These statistics are not included in the monthly releases. Let's focus today on regional unemployment, which decreased in 20 of the 26 regions as defined by level two of the EU nomenclature of territorial units for statistics (NUTS 2). In the remaining six regions, unemployment has increased or remained the same. The regional champion in unemployment is the extreme Southeast, including the provinces of Mardin, Batman, Şırnak and Siirt. Unemployment went up in this region from 12.7 percent to 21.3 percent; this rate is already more than double the national average, but the size of the increase is also incredible. The explanation lies in both a 6.8 percent decrease in employment and a 3.1 percent increase in the labor force. Could the cause of these adverse changes be the unfavorable business climate created by the “low-intensity war” ravaging this region? To investigate this possibility, we have to look at other regions in the Southeast. In two out of three of the other regions in this area, including the provinces of Van, Muş, Bitlis, Hakkari, Gaziantep, Adıyaman and Kilis, the unemployment rate has decreased due to an increase in employment that is stronger than the increase of the labor force. In the third region, which encompasses Şanlıurfa and Diyarbakır, unemployment has still decreased, but in an unhealthy way: Employment decreased but less than the labor force decreased. So, the strong increase in unemployment in the region including Mardin cannot be attributed to the conflict in the Southeast because we do not observe the same pattern in other regions of the Southeast. Therefore, the causes must be sought elsewhere. The area with the second-highest unemployment is the İzmir region, which is in the extreme west of Turkey. The unemployment rate in İzmir increased slightly from 14.7 percent to 14.8 percent. This is not surprising because, for a long time, the Aegean city has had high unemployment rates due to strong increases in the labor force caused by much immigration from eastern and southeastern Turkey, and its economy has been unable to produce enough jobs to compensate for this. This is the dark side of regional unemployment in Turkey. There is also a bright side. The unemployment rate is as low as 4.4 percent in the region that includes the provinces of Manisa, Afyon and Uşak. The second-best rate is held by Balıkesir and Çanakkale at 5.4 percent. In these two western regions, unemployment is at its natural level, which means that the vast majority of unemployed people are those in transition from one job to another. It is remarkable to observe in the region that includes Manisa, Afyon and Uşak a decline in unemployment from 4.7 percent to 4.4 percent despite a strong increase (4.5 percent) in the labor force, simply because employment increased even more, by 5 percent. This rapidly industrializing region has come to have the most dynamic, healthy labor market in Turkey. It is quite astonishing to see that its neighbor, İzmir, possesses one of the worst labor markets. The huge regional disparities in unemployment show that labor mobility is actually still relatively weaker in Turkey. So, regional differences in labor market attributes should be taken into consideration when designing policies to combat unemployment. The regional dimension of these policies matters. The decentralization of the setting of the minimum wage across regions is of particular importance. It is quite detrimental that the government has abandoned this idea.