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December 11, 2012, Tuesday

Growth: Lower than expected

The Turkish Statistics Institute (TurkStat) published on Monday the long-awaited third quarter gross domestic product (GDP) figures. I should say that forecasters, including myself, received a blow. The seasonally adjusted GDP grew by a mere 0.2 percent from the second to the third quarter and annual growth fell from 3 percent to 1.6 percent.

When discussing the issue of growth in this column before, I stated many times that the rate of growth is evolving around 3 percent. It is true that I have been rather pessimistic about the future of the growth, but frankly I was not expecting such an abrupt decline. Therefore, we have to look at the third quarter growth in detail if we want to understand what happened and what could happen in the near future.

The very low quarterly growth rate of 0.2 percent is a result of changes in opposite directions. According to Bahçeşehir University Center for Economic and Social Research's (BETAM) estimations released on Dec. 10, the biggest positive contribution to growth came from private consumption. This is rather good news considering the stagnation of this area in previous quarters. The second biggest contribution came from public expenditure and the third from net exports. Growth in goods and services decreased from the second quarter to the third quarter but imports fell even more. This is rather bad news since growth had been mainly supported by net exports in the past year.

A sizable fall in contribution to quarterly growth was in private investments and inventory change. Private investments had been falling in the past year and it looks to be so for a while because of low capacity use of existing capital stock. On the other hand, firms seem to have reduced their stocks instead of producing more. Inventories had increased in the second quarter. This rapid change in behavior by firms indicates a rather pessimistic attitude of the business community towards domestic demand.

On Monday, TurkStat also published the Industrial Production Index for October which constitutes an advance indicator for the fourth quarter. Here we also have rather bad news. Industrial production decreased by 5.7 percent on an annual basis. Most likely a large part of this huge decline is due to calendar effects of holidays but even when industrial production is adjusted for seasonal and calendar effects, we still observe a decrease of 0.9 percent compared to September. Let me also note that the production indexes of consumer durables as well as those of investment goods have been declining since May: The index decreased from 152 to 147 for consumer goods and from 150 to 131 for investment goods.

No doubt, this year the rate of growth will be much lower than expected by the government. In October 2011, the Medium-term Economic Program (OVP) had forecasted 4 percent growth for 2012. This figure was revised to 3.2 percent in October. Now, admittedly the growth for 2012 will be well below 3.2 percent. During the first nine months of the year, real GDP was only 2.6 percent higher than the real GDP in the same period of last year. Even if we assume a 1 percent growth from the third quarter to the fourth quarter, the growth for 2012 will remain at 2.6 percent. However, industrial production in October does not provide much hope for the last quarter.

As 2012 is coming to an end, let me remind you that the most popular debate of the year among economists was a “soft landing” versus a “hard landing.” Personally, I had thought since spring that the landing would be somewhere in between. But it seems now that the landing will be a rather hard one. At this point the critical question is whether growth will resume a new start next year. Probably yes. Monetary policy has recently been loosened and interest rates have been decreased. The expected real interest rate on Treasury bonds is now almost zero, if not slightly negative. The interest rates on banking loans are decreasing along with financial interest rates. The positive effects of this decline will probably be apparent in the demand for consumer goods and housing at the start of 2013.

But I am almost sure that this jumpstart will not be based on net exports, as has been the case in the past one year, but on private consumption. So forget the rebalancing process in the current account deficit. I have no growth forecast for the next year for this moment. In any case, it may be higher than this year's growth but it will be neither satisfactory nor sustainable in the medium term.

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