The WEO report is optimistic -- according to some outside forecasters too optimistic -- about the global economy’s growth and inflation prospects for 2007 and 2008. It forecasts that the global economy will grow at an annual average real rate of 4.9 percent in both 2007 and 2008, compared to 5.4 percent in 2006. Its 2007 and 2008 estimates of consumer price inflation for advanced countries are 1.8 percent and 2.1 percent, respectively, and for developing countries 5.4 and 4.9 percent, not too different from those in 2006. It sees the biggest risk to its forecasts in a sharper slowing down of the US economy, going beyond the contraction in the housing sector, which could become a serious drag for the rest of the global economy. Of course, other risks such as a spike in world energy prices, a sharp fall in the foreign exchange value of the dollar and another contagious sell-off in emerging country stock and bond markets could blow away these optimistic estimates.According to the WEO report, in 2006, Turkey was among the emerging market countries such as China and India that tightened their monetary policies due to concern with over-rapid economic growth and overheating. Rising inflationary and external pressures were an important reason for monetary tightening in Turkey. The WEO report notes that the increasing worry about Turkey’s gaping current account deficit caused the Turkish lira to depreciate sharply during the May-June 2006 correction in emerging markets. Consequently, the Turkish central bank was forced to tighten monetary policy quickly in order to keep inflation from getting out of control. Monetary tightening was behind the deceleration in Turkey’s real economic growth in the second half of 2006. This caused the annual average real GDP growth to drop from 7.4 percent in 2005 to 6 percent (later revised, based on more recent Turkish government data, from the original figure of 5.5 percent reported in the WEO report) in 2006. On the inflation side, consumer prices rose in 2006 at an annual average rate of 9.6 percent, up from 8.2 percent in 2005.
In other words, between 2005 and 2006, Turkish growth decreased but inflation increased, in a reversal of the trend between 2002 and 2003. The slowing growth and faster inflation Turkish trend between 2005 and 2006 was also the opposite of the trend for countries other than Turkey in emerging Europe (an IMF-grouping of 17 countries in the Baltics, Central, South, and Southeastern Europe, including Turkey) whose annual average real GDP growth rate rose from 4.7 to 6.2 percent as their annual average consumer price inflation fell from 3.5 to 3.2 percent. These opposite trends, if they were to continue to the disadvantage of Turkey, could cause the fizzling out of Turkey’s recent inward foreign direct investment (FDI) surge (see my earlier columns on the topic), as FDI is attracted more strongly toward host-countries with higher growth and lower inflation. It is worth noting that during 2005-2006, as its growth fell and inflation rose, Turkey’s current account deficit, as a percentage of GDP, jumped from 6.3 to 8 percent, showing once again that rising current account deficits do not always bring about higher growth.
The WEO report forecasts for Turkey, like those for the global economy, for 2007 and 2008 are relatively optimistic and encouraging. It estimates average annual real GDP growth rates of 5 and 6 percent, average annual consumer price inflation rates of 8 and 4.3 percent, and current account deficit/GDP ratios of 7.3 and 6.8 percent for 2007 and 2008, respectively. Of course, the realization of these estimates will depend to a great extent on Turkey’s political stability in the near future. I believe that any weakening, especially a loss of the Justice and Development Party’s (AK Party) majority in Parliament after the upcoming general elections, is likely to render the IMF’s optimistic forecasts unrealizable, if rational economic policymaking becomes a victim of short-term political maneuvering among rival political parties jockeying for power. That would be a sad retrogression to Turkey’s lost decade of the 1990s.
