Consumer confidence in freefall

In my last column (on Saturday) I commented on worries regarding economic growth based on early leading indicators for 2015. Domestic demand, particularly private consumption, as well as exports, are almost stagnating in the first months of the year In my previous column I had noted the loss of consumer confidence, which has been falling since April 2014.

Today (Monday), the Turkish Statistics Institute (TurkStat) published the consumer confidence index for March 2

In my last column (on Saturday) I commented on worries regarding economic growth based on early leading indicators for 2015.

Domestic demand, particularly private consumption, as well as exports, are almost stagnating in the first months of the year In my previous column I had noted the loss of consumer confidence, which has been falling since April 2014.

Today (Monday), the Turkish Statistics Institute (TurkStat) published the consumer confidence index for March 2015 (CCI). Compared to February, the index has declined by 37 percentage points, from 68.

1 to 64.4, confirming worries about economic growth.

The Turkish economy has suffered from low growth for three years. The average gross domestic product (GDP) growth rate grew by barely 3 percent in the period 2012-2014.

Private consumption, the main component of GDP by far (having a share over 70 percent) was the leading item of growth in the aftermath of the big crisis of 2001, except during the global recession.

Nonetheless, domestic-led growth, combined with an appreciation of the Turkish lira, pushed the current account deficit up, and it reached almost 10 percent in 2011.

At that time, the government decided to make an adjustment to the growth regime through some measures aiming to control private consumption and to encourage exports. Officially called andldquobalanced growth,andrdquo the new regime in 2011 targeted a modest growth of private consumption with a positive contribution of net exports to economic growth.

GDP growth rates were planned to increase 5 percent, but this goal was never reached. Private consumption has since been very weak and private investment has slightly declined.

A high correlation exists between the evolution of private consumption and consumer confidence. In 2004 the confidence index was close to 100 points.

On the eve of the global recession it was still over 80 points. In the first quarter of 2009, the confidence index declined to around 60 points, representing the deepest point of the crisis for the Turkish economy.

Then the index enjoyed a rise and a strong recovery, and reached its peak of 83 points in June 2011. After this date, the confidence index experienced ups and downs with a slight tendency to decline, while GDP growth decreased remarkably to an average of 3 percent from an average of 6 percent.

The last peak of the index was in April 2014, at 78.5 points.

For almost one year, consumer confidence has been rapidly declining. Finally it reached 64.

4 points this month, experiencing its sharpest monthly fall.

It is interesting to scrutinize the details of this fall.

There are 18 variables composing the CCI. These variables are related to the financial situation of households, the general economic situation, to spending assessments on durable consumption goods and to expectations about these positions.

Saving intentions, wage expectations and intentions to buy a house are also part of these index-composing variables. All of these variables have been decreasing since April 2014.

Except for two variables — peopleand#39s intention to borrow money over the next three months and their intention to buy a house — all other variables experienced a sizeable decline from February to March. It is worthwhile to note that the index level is now not far from its deepest point (around 60 percent), which it attained in the first quarter of 2009, the worst period of the economic crisis.

How to explain this increasing weakness in consumer confidence? In my article on Saturday I admitted that andldquothe reasons are rather unclear,andrdquo but one may think out loud. I do not share the high real interest rates approach.

The level for bank loans is roughly 4 percent, which is rather low in a Turkish context. I believe that the rapid indebtedness of households during the last decade might be one of the main causes.

It is possible that low GDP growth, stagnating incomes per capita and the increase in unemployment may have pushed households to borrow less in the first three months.

Some of the sub-indexes continued in a similar manner The statement on the current financial situation of households declined from 79.

6 percentage points to 70.8 points in the last 11 months.

Expectations for unemployment decreased from 85.4 points to 65.

3 and expectations for wage increases from 95.4 points to 91.

2

To sum up, the last big decline of the consumer confidence index augurs badly for GDP growth at the moment. How consumers might get back their confidence remains an open question.

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SOURCE: Today’s Zaman