The Turkish economy has been among the hardest hit by the Great Recession, although it did not suffer directly from the global financial crisis. The devastating effects of the macroeconomic shocks on household welfare on multiple fronts are analyzed in the recent World Bank study The Crisis Hits Home. Fortunately, the latest data issued by the Turkish Statistics Institute (TurkStat) last month show that the contraction of the real gross domestic product (GDP) continued to decelerate in the third quarter. After contracting 14.7 percent and 7.9 percent year-on-year in the first and second quarters, respectively, the real GDP contracted 3.3 percent in the third quarter, less steeply than expected by most forecasters. In the first nine months of 2009, the real GDP contracted 8.4 percent year-on-year. Although the real GDP has been growing quarter-on-quarter since the second quarter and the recent economic indicators point to positive year-on-year growth in the fourth quarter, it is expected to contract around 6.0 percent for all of 2009. In contrast to the relatively good news on the real GDP front, the unemployment picture still looks dim, as I discussed in my last column. This is, as is the case for most other economies, still a jobless recovery.
Several recent developments confirm the economy’s continued recovery. As part of the good news last month, Fitch Ratings upgraded Turkey’s sovereign long-term foreign currency issuer default rating (IDR) to BB+ from BB-, its long-term local currency IDR to BB+ from BB and its country ceiling to BBB- from BB. This upgrade reflected “Turkey’s relative resilience to the severe stress test of the global financial crisis and some easing in prior acute constraints related to inflation, external finances and political risk.” Fitch attributed much of this resilience to the strength of the Turkish banking sector but expressed concerns about Turkey’s public finances due to a widening budget deficit and a heavier debt burden. In its summary of last month’s Monetary Policy Committee (PPK) meeting, the Turkish Central Bank confirmed that “the economic activity is on a moderate but stable upward trend,” thanks to the quarter-on-quarter recovery of industrial production and private investment. It emphasized that given the still moderate inflation and the less than full recovery, it would keep its policy rates at low levels for a long time. In recent days, both Economy Minister Ali Babacan and Prime Minister Recep Tayyip Erdoğan have spoken favorably about the possibility of a long-delayed new stand-by agreement with the International Monetary Fund (IMF). Such an agreement is bound to boost the economy’s prospects by increasing confidence at home and abroad.
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The Organization for Economic Cooperation and Development’s (OECD) latest monthly composite leading indicators (CLI), for October 2009, reported last month, show signs of continued improvement in the economic outlook for both the OECD area and Turkey. The CLI for the OECD area increased by 1.04 points in October 2009 over the previous month and was 5.74 points higher than in October 2008. The CLI for Turkey, which has been improving at a slowing rate since last May, increased by only 0.15 points in October 2009 over the previous month but was 9.43 points higher than in October 2008.The OECD CLI are aimed at providing early signals (with an average lead of six months) of turning points (peaks and troughs) between upswings and downswings in the growth cycle of aggregate economic activity, using the deviation-from-trend approach. They are constructed to predict cycles in a proxy reference series (monthly index of industrial production) that represent economic activity. The variation in aggregate output (real GDP), relative to its long-term potential is measured as the deviation of observed output from potential output, called the output gap. The fluctuation in the output gap, as a recurrent sequence of alternating phases of expansion and contraction between the peak and the trough, in economic activity, is called the business cycle. The OECD CLI are constructed from a wide range of real and financial indicators whose cyclical fluctuations are similar to but precede those of the business cycle, to signal turning points in the reference series. The figure below shows four cyclical phases for the OECD area and Turkey in terms of (1) expansion -- CLI increasing and above 100; (2) downturn -- CLI decreasing and above 100; (3) slowdown -- CLI decreasing and below 100; (4) recovery -- CLI increasing and below 100. Turkey, whose trough was lower with a worse contraction than that of the OECD area, entered the both the recovery and the expansion phases earlier than the OECD area.
According to the Turkish Central Bank’s latest Business Tendency Survey, published last week, the monthly real sector confidence index, which has been falling since August, rose from 91.2 in November to 92.2 in December, although it has not yet gone over 100 to indicate an optimistic outlook. All components of the index, except the total employment component, registered improvements last month over the previous month. Among the factors limiting production, insufficient demand was by far the most important one. The financial constraints factor was the least important after labor shortage, confirming the recently released results of the World Bank’s Enterprise Financial Crisis Survey that despite the severity of the credit crunch, for most firms, contraction in demand was by far the most significant effect of the crisis.
The consensus of private forecasts is that the real GDP will grow between 4 percent and 5 percent this year, which would be one of the highest in the world if realized. The official forecast is 3.5 percent according to the government’s Medium-Term Program. Both the IMF and the OECD forecast a growth of 3.7 percent in 2010. According to the Turkish Central Bank’s latest monthly Survey of Expectations, taken last month, the expected growth rate for 2010 is 3.4 percent, the highest expected rate in 12 months. Of course, all these forecasts depend on the improving performance of the global economy as well as Turkey’s continued political stability. Any unexpected shocks will darken the increasingly positive prospects of the Turkish economy. I wish all my readers a prosperous new year.
