Growth higher than expected in Q3

I also used it in September in an article commenting on economic growth in the second quarter. Indeed, the year-on-year gross domestic product (GDP) growth rate reached 4 percent in the third quarter and the quarter-on-quarter seasonally adjusted growth rate was 1.3 percent. The annual growth of 4 percent did not surprise me, since cumulative GDP growth had already attained almost 3 percent in the two first quarters.

However, the quarterly GDP increase of 1.3 percent, which is in fact much more significant and relevant than the annual figure, exceeded all expectations. Economists, including myself, had forecast growth below 1 percent, given the huge fall in consumer and real sector confidence indexes and the climate of uncertainty characterizing the interim period of the two general elections. How do we explain the underestimation of GDP growth in the third quarter?

Well, first we could not predict that the appetite for consumption would be so great, all the more since consumer confidence appeared to be in free fall. Much to our surprise, private consumption increased by 1.4 percent on a quarterly basis and contributed 0.9 percentage points to the 1.3 percent growth. In the second quarter, private consumption increased by only 0.6 percent. The lesson is that the consumer confidence index is not as good a leading indicator as previously believed. Secondly, the contribution of net exports was also underestimated. Personally, I was expecting a positive contribution of net exports but not to such an extent. A full 1.9 percentage points of the quarterly GDP growth came from foreign trade as exports increased by 1.7 percent — a contribution of 0.5 points — while there was a strong decrease of 5.1 percent — 1.4 points — in imports. Let me note that this striking fall in imports might be explained partly by the decrease in energy prices and partly by a sizable depreciation of the lira in the third quarter.

A third positive contribution of 0.3 points came from public expenditures, which increased by 2 percent from the second to the third quarter. This is a rather high increase on a quarterly basis but it might still be considered modest given the dramatic electoral atmosphere by the incumbent ruling party that lost the June 7 election but managed to call for a new election on Nov. 1.

Summing up these contributions, we already have a quarterly growth rate of 3.2 percent. So, the primary negative contribution was a sizable decrease in private investments, casting a shadow on the good growth performance. Indeed, private investments declined by 6.7 percent compared to the second quarter. Now, it increased by 6.8 percent from the first to the second quarter. Let me note that the large increase in private investment in the second quarter was by far the sole factor explaining the higher-than-expected growth in the second quarter. Obviously, strong fluctuations in investments are still ongoing and they constitute the weak point of growth dynamics in the economy. This sizable decline in private investments lowered quarterly growth by 1.4 percentage points. A fall in stocks was the other negative contribution.

As we can still assume a rather good growth performance in the fourth quarter, it is quite likely that GDP growth will reach at least 4 percent this year, surpassing all previous forecasts made by international organizations like the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD), etc. The basic question about the growth performance of the economy is actually whether the GDP growth rate can reach 5 percent, considered the potential growth rate and targeted in the Medium-term Economic Program (OVP) for years, or fall to 3 percent, approximately the average rate of the last four years. Large income transfers promised by the incumbent party during the electoral campaign are actually on the government’s agenda. An intense push on consumer demand should be expected during 2016. Nonetheless, the answer to the question depends essentially on the effective implementation of reforms announced by Prime Minister Ahmet Davutoglu on Thursday. I hope to comment on them next time.