The main features of the Turkish economy during the recent past are very well summarized in the OECD policy note: “Growth has slowed since mid-2011, with private consumption, investment and imports losing steam. Exports, however, are surging as manufacturers have successfully diversified away from the weak European markets and towards higher growth Middle East, African and Asian markets. This shift has been facilitated by sizeable nominal exchange rate depreciation following the decline in risk appetite in global markets and Turkish policy efforts to reverse earlier appreciation. As a result, the current account deficit, which peaked at 10 percent of gross domestic product (GDP) in the first half of 2011, fell below 7 percent in 2012. Headline consumer price inflation peaked at 10.5 percent in late 2011 and has begun to edge down only slowly.”
I have nothing to add to this analysis. However, the growth forecasts of the OECD for the next two years deserve discussion. The OECD thinks that “GDP growth will pick up from 2.9 percent in 2012 to just over 4 percent in 2013 and 5 percent in 2014, in the absence of any further headwinds from the international environment. … Risks are skewed to the downside, and emanate largely from the euro area. The current account deficit and hence funding risks are projected to remain high.” This growth pickup would originate mainly from domestic demand. Indeed, the private consumption growth rate would increase from -0.3 percent in 2012 to 3.5 percent in 2013 and then to 4.4 percent in 2014, and private investment from -2.3 percent to 4.1, and then to 7.8 percent, while fiscal policy would remain tight. Regarding the foreign trade sector, exports of goods and services would decelerate from 15.3 percent to around 5.9 in 2013, then increase to 6.8 percent in the following year, while import growth would pick up from -0.7 percent to 5.5 and 5.8 percent during the next two years.
The critical point in these forecasts is the switch from export-led growth, which has characterized Turkish growth for the last year, to the more usual domestic-driven growth. Indeed, the contribution of net exports to growth will become slightly negative according to the OECD. This means the abandonment of the rebalancing process that had been Fitch's main argument when it decided to upgrade Turkey to investment level. The “wait and see” attitude of Moody's, its fellow rating agency, could be revealed to be the wiser in this context (see my column of Nov. 19, “Why can't credit agencies agree?”). The OECD is aware of this risk when it points out that the “current account deficit and hence funding risks are projected to remain high.”
However, I believe that this risk is manageable. In the macroeconomic outlook drawn by the OECD, the current account deficit ratio to GDP increases slightly from 7.2 percent to 7.5 percent in two years. This level of the current account deficit, albeit quite high, can be financed easily if no concession is made regarding fiscal discipline and if the European Union anchorage is not forsaken. Nevertheless, I am skeptical about the new appetite both for consumption and for investment. It is true that following a controlled loosening of monetary policy by the central bank, interest rates have been lowered remarkably in recent weeks and we can expect, with good reason, an increase in the demand for consumer durables and housing. But I am not sure about the investment pickup, given the fact that the rate of capacity use for capital stock has declined to its lowest level since the economic crisis of 2008-09.
A second question mark in the OECD forecast is the projected increase in exports. Taking into consideration the ongoing recession in Europe and the slowing growth in the world economy, this projection risks being revealed as unrealistic, and all the more so since the Turkish lira is on an appreciating path. If exports increase less than expected, the net export negative contribution to growth will be more sizable, and growth will be lower than projected. At that point, unemployment risks emerge. The OECD expects a limited rise in the unemployment rate from 9 to 9.3 percent next year, but then a decrease to 8.7 percent, just at a time when three successive elections will take place.
So far so good. But if growth is lower than expected, unemployment will continue to increase. I am afraid that if this unfortunate scenario occurs, government could panic and abandon fiscal discipline. Such an event is capable of damaging the still fragile economic stability.