In the third quarter of 2007 the gross national product (GNP) increased by 2 percent, the lowest rate in the last 22 quarters. In the first nine-month period of 2007 the growth rate remained at 4 percent, below the 5 percent year-end goal. With lower-than-expected figures for the third quarter, the 5 percent growth year-end target has become quite hard to attain. The major reason behind this sharp break was obviously a major decline in agriculture due to unfavorable climate conditions and the surprising erosion of the construction industry due to high interest rates, as well as the popular mortgage sector syndrome.
As the engine of the economy, industry has also recorded an unsatisfactory performance, with a rise of only 3.7 percent. However as the 7.9 percent October industrial growth performance is quite extraordinary compared to the previous nine months, the fourth-quarter growth performance may compensate the third-quarter losses so as to achieve annual targets.
After the third-quarter data, the Turkish Central Bank policy environment has become quite complicated. As inflation is considered, it has become quite risky to continue interest rate cuts because of the significant rise in final consumption expenditures. As far as the overall growth performance is concerned, there must be a significant decline in interest rates so as to motivate economic activities. I personally expect a half-point cut.
However the current malaise is quite beyond the central bank's capacity to tackle. As Organization of Economic Cooperation and Development (OECD) economist Rauf Gönenç has noted, progress with enhancing the resilience and performance of the economy is put at risk by a loss of competitiveness provoked by booming capital inflows. In this context the government is encouraged to restore fiscal restraint, which would help the central bank to continue reducing interest rates and to increase the flexibility of the product and labor markets to help the economy cope with strong appreciation.
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