The Turkish lira has not depreciated since the Central Bank of Turkey began slashing its benchmark borrowing interest rate last November, by a cumulative 8 percent reduction, to a record low of 8.75 percent after its latest cut of 0.5 percent on June 16. (It may repeat its 0.5 percent cut this month, followed by a final 0.25 percent cut in August.) In recent months, the Justice and Development Party (AK Party) has also tried belatedly to stimulate the economy through various fiscal measures such as tax cuts and industrial incentives. Turkey's unemployment rate, measured as a three-month average, dropped to 15.8 percent in the February to April period from a record high of 16.1 percent in the January to March period. However, some of this improvement could be due to seasonal factors related to increasing labor demand in agriculture.
In the second quarter, after stagnating in the first quarter, the Turkish stock market was on a roll, with the benchmark İstanbul Stock Exchange (İMKB) National 100 index rising by 43 percent from 25,765 at the end of March to 36,798 last Friday in Turkish lira terms, placing it among the top performing emerging markets along with India and Argentina. Turkish stocks did even better in US dollar terms, with the İMKB National 100 index rising by 55 percent. I regard the stock market as a mostly but not always reliable leading indicator of recovery in the non-financial economy.
The ABN AMRO Turkey Manufacturing Purchasing Managers' Index (PMI), a composite leading indicator that provides an overall view of manufacturing sector activity, has been rising since last March. In April it rose to 43.7 from 37.0 in March, the largest month-on-month movement in the survey's history. Although at below 50.0, as it is calibrated, the PMI still indicated a decline in manufacturing activity, it was the slowest rate of decline since last August, when the index began to drop. In the last two months, however, it has climbed over 50.0, reaching 51.0 in May and 53.9 last month, indicating burgeoning expansion in output, new orders and employment, among other activity components.
According to the central bank's summary statement on the Monetary Policy Committee's (PPK) June 16 meeting, issued on June 26, “recent data releases point to a partial recovery in economic activity” and “indicate that the worst may be over.” But the central bank believes that after the positive short term of the recent fiscal stimuli works itself off, a robust increase in private consumption is essential to sustained solid medium-term recovery. In a recent speech to the Samsun Chamber of Commerce and Industry, Central Bank of Turkey Governor Durmuş Yılmaz said, “Current indicators suggest that expectations related to orders for the next three months point to a recovery and that industrial production will gain stability in the second quarter of 2009.”
According to the central bank's latest Business Tendency Survey, the monthly Real Sector Confidence Index, which fell steadily from 98.3 in June 2008 to 52.3 in December 2008, has been rising from 59.4 in January, 62.6 in February, 67.8 in March, 85.1 in April and 96.9 in May to 99.4 last month. The central bank's Consumer Confidence Index, which fell steadily from 80.72 in September 2008 to 68.88 in November 2008, has been rising from 69.90 in December 2008, 71.56 in January, 74.01 in February, 74.77 in March and 80.75 in April to 83.28 in May. Although both these indices have to climb over 100 to indicate optimistic outlook, their recent upward trend is itself a cause of cautious optimism.
At the end of the week, the Turkish Statistics Institute (TurkStat) announced the latest inflation numbers. The 2003=100 based producer price index (PPI) rose by 0.94 percent on the last month, by 3.27 percent on last December and by a 12-month moving average rate of 7.34 percent, but declined by at an annual rate of 1.86 percent year-on-year relative to June 2008. In terms of the 12-month moving average, the PPI registered continued disinflation since the beginning of the year, with the inflation rate falling from 12.81 percent in January, 12.63 percent in February, 11.99 percent in March, 10.65 percent in April and 8.96 percent in May to 7.34 percent last month. The 2003=100 based consumer price index (CPI), on the other hand, rose by 0.11 percent on the last month, by 1.83 percent on last December, at an annual rate of 1.86 percent year-on-year relative to June 2008 and by a 12-month moving average rate of 9.08 percent. In terms of the 12-month moving average, the CPI, like the PPI, registered continued disinflation since the beginning of the year, with the inflation rate falling from 10.54 percent in January, 10.41 percent in February, 10.29 percent in March, 9.98 percent in April and 9.49 percent in May to 9.08 percent last month. We can conclude that the economic crisis has contributed to welcome disinflation in Turkey, helping the central bank greatly in its inflation targeting, but not creating (at least not yet) the danger of deflation.
So, the Turkish economic crisis has been really bad, but its worst part seems to fortunately be already behind us. Still, I believe that the AK Party government, as insurance against an unseen catastrophic turn of events, should seek a new stand-by arrangement with the International Monetary Fund (IMF), which could actually speed up the recovery by raising both domestic and international confidence. Furthermore, in order to lay the foundations for sustained solid growth in the medium term, the government should resume its structural economic and political reforms, which it has not embraced in its second term as fervently as it had in its first term in office.
