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April 15, 2012, Sunday

Signs of a slowdown

The publication of data by the Turkish Statistics Institute (TurkStat) last week contained two pieces of news, one bad and one good. Let’s start with the bad news.

The seasonally adjusted Industrial Production Index (IPI) increased by a mere 0.7 percent from January to February, and this after a decrease of 3 percent from December to January. So industrial production still lies well below its December level and shows clear signals of a slowdown. The good news is that the foreign trade quantity index revealed a 4.8 percent rise in exports and a 0.2 percent decline in imports in February. This is rather good news since it indicates that the narrowing of the huge current account deficit (CAD) is still on the way, but at the same time it signals a weak investment climate with the importation of investment goods decreasing for two consecutive months.

Nevertheless, a slowdown in growth is not only expected, but also desired, as I explained in my first column (“Exports will be the key for a soft landing,” Feb. 21, 2012. The reason is simple: The high growth based on domestic demand with a huge CAD was not sustainable and needed to be steered towards a more balanced path: the so-called soft-landing scenario. To briefly recap, this scenario consists of a growth rate of around four percent and a decline in the CAD ratio from 10 to 8 percent of Gross Domestic Product (GDP). The problem is that the CAD forecast can be achieved but at the expense of lower economic growth.

How much less? Probably growth would not decelerate to 1 or 2 percent, as is claimed by the hard landing camp, but to a paltry 3 percent. The Bahçeşehir University Center for Economic and Social Research (BETAM) estimates, in a paper published in Economic Outlook on May 13 titled “Pronounced Slowdown in Turkish Economy,” a 0.3 percent growth from quarter to quarter for the first three months of this year, which brings the yearly growth down to 3.5 percent Giving the momentum of the growth dynamic, personally I think that yearly growth for the second quarter would even be under 3 percent. The blame should be put essentially on the lack of appetite among households for consumer goods as well as on the loss of “animal spirits,” (emotions) as famous economist John Maynard Keynes put it, among investors.

The more-than-expected slowdown in economic growth will have unpleasant political consequences for sure. With a 4 percent growth rate, one was already expecting a slight increase in unemployment, which has been on a declining path since 2010, thanks to high growth. With a 3 percent growth rate, things could be quite bad on the unemployment front. Fortunately the situation is not hopeless. The central bank being absolutely obliged to get inflation appreciably down has its hands fettered, so monetary policy must be kept tight. But the government is capable of reacting on two fronts. A fiscal space, which in other words means the possibility of increasing the budget deficit, exists. Indeed, the deficit went as low as 1.4 percent of GDP last year, and the first figures of this year in regards to public finance are quite encouraging. A moderate relaxation on fiscal discipline, which indicates an additional 1 percentage point of GDP for the deficit for this year, would not have adverse effects on expectations nor on the public debt ratio, which would continue to decrease, albeit at a slower pace.

The other tool to rejuvenate the economy is structural reforms. The new investment incentive scheme announced more than a week ago is already capable of giving a push to investments in the second half. But a more efficient way to reverse the sluggish business climate is to proceed with the structural reforms. And there is good news on this front. Two weeks ago I revealed in this column the intentions of the Ministry of Finance to fight tax evasion, in order to decrease labor costs by using “fiscal devaluation.” Labor and Social Security Minister Faruk Çelik announced very recently that the severance pay reform will be on the government’s agenda very soon. Today Deputy Prime Minister Ali Babacan will discuss measures to encourage savings at a meeting of the Economic and Social Committee.

However, we cannot forget the existence of the risks. Still the same ones: a backlash in the Middle East amid the failure of the Annan plan for Syria, and the nuclear negotiations over Iran as well as a meltdown in the eurozone. Do not forget that exports are the key for a soft landing. Turkish exports to Europe, which account for more than 40 percent of our foreign markets, are already stagnating. General elections will be held in Greece on May 6, and surveys forecast a majority vote for the opponents of the current stabilization program. And on the west coasts of the Mediterranean Sea the interest rates are increasing by leaps and bounds.

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