Almost balanced growth is under way

ISTANBUL (CIHAN)- I wrote on Saturday that economic growth has become a hot political issue, arguing that Prime Minister Recep Tayyip ErdoIan and his inner circle are concerned by a growth rate of below 4 percent, which would not allow the incumbent party to face the next two elections in economically favorable conditions. This is why Mr. ErdoIan insists on lowering the interest rate in order to boost domestic demand.
On the other hand, Deputy Prime Minister Ali Babacan, in charge of economic affairs and supported by the central bank management, is trying to maintain the monetary and fiscal policies in such a way that economic growth remains balanced — which means net exports and domestic demand contribute equally to growth. It is expected this so-called balanced growth will curb both rising inflation and the high current account deficit. Aocates of balanced growth believe a growth rate of close to 4 percent this year is possible. This growth level, although rather low for electoral purposes in the context of Turkey, would be a success if inflation and the current account deficit, the two main sources of fragility, are lowered.

So far so good. However, we do not know yet if economic growth will be close to 4 percent, or below 3 percent. In my piece on Saturday I mentioned that a large majority of growth forecasts for this year were below 3 percent. But what about recent forecasts based on the first leading indicators? The economic outlook published by the BahçeIehir University Center for Economic and Social Research (Betam) last Friday gives a good idea about the issue. Betam’s outlook is based on the main macroeconomic indicators, such as detailed industrial production, exports and imports, etc., of the first two months and on the production capacity use figures for the whole quarter.

Betam’s findings may be summarized as follows: From quarter to quarter, the private consumption change is slightly negative, while private investment is stagnating. This seems to be the case for public spending since the budget deficit evolved at a very low level in the first months. However, exports are increasing, while imports are slightly decreasing. Admittedly, economic growth is shouldered by the net exports in the first quarter. Taking these findings into consideration, Betam forecasts a growth rate of 0.5 percent from quarter to quarter. This rate gives a yearly growth of 3.8 percent. The current account deficit to gross domestic product (GDP) ratio is expected to decrease from 7.9 percent to 7.5 percent, while the ratio excluding gold imports and exports is forecast to decrease from 6.5 percent to 6.3 percent. Thus, we can say that almost a balanced growth is under way, but the growth rate is likely to be under 4 percent.

Will growth performance be improved in the next quarters? The pros and cons exist together. Consumers and investors’ confidence have increased recently. Considering the recent appreciation of the Turkish lira, the central bank gained some room for limited interest rate lowering. The government also has some room for a boost in public spending without jeopardizing budget discipline. So, the contribution of private consumption to growth may turn from negative to positive in the next quarters.

Nevertheless, the prime minister is continuing his fight against the so-called “parallel state” and is maintaining the high tension and fractures in the society. He even opened a new front against the Constitutional Court by harshly criticizing the judges and accusing them of interfering in politics. Their sin was simply cancelling the Twitter ban and some articles of the recent law that were giving too many prerogatives to the minister of justice over the Supreme Board of Judges and Prosecutors (HSYK). The court determined that these prerogatives contravened the principle of separation of power between the executive and judicial branches. So, political uncertainties and risks of further confrontation continue.

Recently, Moody’s maintained the rating of Turkey at the investment level (Baa3) but changed its outlook from stagnation to negative — precisely because of the political uncertainties. This is rather bad news for all kinds of investments.

To sum up, I can say the growth forecasts below 3 percent seem to be quite pessimistic given the growth under way. That said, a growth rate of over 4 percent does not seem very likely. A key political economic factor in these circumstances would be developments in the unemployment rate. While you are reading this article, the labor market figures of January will have already been published. I will comment on them on Saturday, but I expect that the unemployment rate will remain almost unchanged, at least for the time being.

SEYFETTIN GuRSEL (CihanToday’s Zaman) C