Political restructuring of the right-wing parties and Prime Minister Recep Tayyip Erdoğan's recent merger offers to other parties are all examples of this. Of course there are economic consequences for this development: 2012 will be the key.
The Turkish economy has structural problems, like its current account deficit (CAD) and inflation. A prime minister who wants to be the president in two years would understandably like to see higher economic growth numbers in 2013 and early 2014. This means policymakers will try to implement expansionary monetary and fiscal policies, and controlling domestic demand-led growth will not be a primary concern. This tells us that structural issues like the CAD and inflation will be swept under the rug in the upcoming years. Whatever Turkey can address in the coming months will help policymakers ease the pressure to a certain extent in the coming years.
All these developments require better than expected CAD and inflation readings in 2012. Hence, better international trade statistics, improvements in trade balance and better than expected tourism numbers are all musts for 2012. Then what has been going on in the first half of the year? Have we successfully managed this restructuring?
Yes and no. I was in Turkey over the last three weeks and I had the chance to talk to many small business owners and ordinary citizens. Everybody is complaining about the slowing economy with the very strong growth years of 2010 and 2011 in mind. Domestic demand is heavily controlled and this can be easily seen by ordinary citizens. All postponed consumption has been made in the last two years and real estate, automotive and other sectors have shown a significant slowdown on the retail side. These are all outcomes of the soft landing strategy implemented for 2012. And no ruling party would like to receive such criticism in an election year.
In the first half of the year exports increased by 11.3 percent and reached $73 billion. Imports, on the other hand, were mostly contained and increased only marginally. This in turn helped reduce the CAD in the first quarter considerably. The 3.2 percent economic growth in the first quarter of 2012 seems to have been the lowest point and industrial production (increased from 1.8 percent in the first quarter and 5.9 percent in the second) has shown that growth in the second quarter will be better than the first quarter of 2012. Unemployment figures announced on Monday also support this scenario and declined 0.9 percent to 9.0 percent, and more than 340,000 jobs were created in April. However, considering the depreciation of the Turkish lira in the last year, export performance is not very satisfactory due to mostly external reasons, like the European debt crisis.
Slowing domestic demand also helps contain domestic inflation and at the end of the year, the central bank will have the upper hand and see single-digit inflation within the targets it announced at the beginning of the year. But if we see better growth numbers than the first quarter, as I said in the first part of this column, then the CAD will probably also dip and start to increase with this growth, which is not something we want to see.
How about the exchange rates? This all depends on how the European crisis will evolve. That's why it will be watched closely. But critical decisions taken over the last two months by European policymakers seem to have eased the tsunami coming from that side and liquidity seems to be plentiful for the coming months. This is also positive news for Turkey. The US Federal Reserve is considering a new round of quantitative easing and their messages today and tomorrow will be critical for the growth expectations of the world. China, like other emerging economies, is trying to jump start slowing growth numbers by expansionary policies and all these will of course have a positive impact on growth but raise some questions regarding CAD and inflation.
The International Monetary Fund (IMF) also lowered its growth expectations for 2012 and 2013 in its last update announced on Monday, which will give central banks more reason to implement accommodative policies. How long the European optimism under these conditions will last is a question yet to be answered. And how Turkey will weather this new infrastructure remains to be seen. Critical months are ahead.