OECD lauds Turkey’s economic performance, points to unemployment

 In its latest twice-yearly Economic Outlook Report, released on Wednesday, the Paris-based organization praised Turkey's economic performance, noting that “prudent macroeconomic management helped to improve domestic and international confidence.”

An export-led recovery started to take place in Turkey’s gross domestic product (GDP) after the first quarter of 2009, the report read, also citing private consumption growth as another factor leading to this end.

The organization projected the recovery to remain strong for a prolonged time, predicting that GDP will grow by 6.8 percent this year and be followed by an expansion of 4.5 percent in the coming year. In its forecast in November of last year the OECD projected that Turkey would grow by 3.7 percent in 2010 and 4.6 percent in 2011. In its report dated June 2009, the growth prediction for 2010 was 2.6 percent.

Investment and growth may turn out even stronger, the report said, if competitiveness and export strength are preserved. However, the OECD cautioned, the recovery may be weaker “if pre-electoral or macroeconomic uncertainties undermine confidence or if the competitiveness of the business sector falters.” Turkey’s next general elections are scheduled for July of next year.

The OECD placed special emphasis on Turkey’s export performance for cyclical developments in the country, despite their comparatively low share in overall GDP. Even though the European Union market, receiving the lion’s share of Turkey’s exports, remains weak, exporters have been shifting to other markets such as Asia, Russia, North Africa and the Middle East, the report noted. “Ongoing currency appreciation despite high inflation is squeezing exporters’ profit margins, but this is partly offset by wage moderation and enterprises’ ability to innovate and improve delivery terms. Nonetheless, looking forward, maintaining price competitiveness will be crucial for aggregate export performance,” it read.

Unemployment to remain high

Contrary to positive projections for economic performance, the OECD warned Turkey against the risk of increasing unemployment. The report noted that “job creation will not be strong enough to absorb the rapidly growing labor force.” According to forecasts of the OECD, the unemployment rate will rise further in the coming years, up from 13.7 percent as of the end of 2009 to 14.9 percent this year and increasing further to 15.9 percent in 2011.

The OECD said that unemployment in Turkey remains high despite the acceleration of growth and net job creation and pointed to the need for fundamental labor market reforms and the implementation of new and more flexible rules to address the problem. “Employment in both rural and urban areas grew despite the contraction of output in 2009, reflecting large-scale labor hoarding facilitated by nominal wage cuts. However, this was not enough to offset steady inflows of people to the labor market, driven by demographic factors and ‘second earner’ effects, which lead to higher unemployment,” the report stated.

The organization also mentioned Turkey’s risk premia, which had rapidly normalized after the global financial crisis and decreased further since autumn 2009. All rating agencies upgraded the sovereign credit rating of the country, the report noted, adding: “As of April, business confidence reached levels associated with expansion. Financing conditions kept improving, especially for large-size borrowers.”

OECD raises global growth forecast due to Asia

The economic recovery in the world’s richest countries is accelerating thanks to a “substantial” rebound in trade and growth in Asia, but austerity measures are needed to reduce deficits as Europe’s debt crisis proves tenacious, the OECD said.

Serious risks including Europe’s sovereign debt crisis and a possible boom-bust scenario in emerging markets such as Brazil, India and China still threaten a “relatively auspicious” economic environment, it noted, adding, “The period of significant financial instability that began in August 2007 is not yet over.”

The OECD also raised its forecasts for economic growth in its member countries to 2.7 percent this year, up from its forecast of 1.9 percent last November. The OECD lifted its forecasts for Japan, the US and the eurozone countries, but Japan and the US are still expected to outpace Europe, the report said. Europe’s response to its sovereign debt crisis has been “prompt and massive,” the OECD said, but has failed to settle the currency bloc’s “underlying weaknesses.”

Unemployment in the OECD area is forecast to peak at 8.5 percent by the middle of this year, Secretary-General Angel Gurria said.

The OECD predicts the US economy will expand at a rate of 3.2 percent in 2010, up from a November forecast of 2.5 percent. In Europe, the economies of the 16 countries sharing the euro are now expected to grow by 1.2 percent this year compared to a November forecast of 0.9 percent.

The recent weakness in the euro versus the dollar will benefit European growth, OECD chief economist Pier Carlo Padoan said. “I would not be concerned if we see a further decline in the euro,” Padoan said, “This would be a welcome addition to external demand for the euro area.” Padoan added that “the global economy needs some rebalancing in exchange rates,” saying that the euro has been overvalued versus the dollar and China’s currency undervalued.