SEYFETTIN – Fall in industrial output and the state of economy

Fall in industrial output and the state of economyBeginning the week with rather bad news is not encouraging. According to the Turkish Statistical Instituteand#39s (TurkStat) the seasonally adjusted industrial production index declined by 14 percent compared to December 2014.

The monthly contraction covers all industrial goods except investment goods and energy. The most critical item, intermediate goods production, decreased by 27 percent, durable consumption goods by 5 percent and non-durable goods by 2 percent, while the production of investment goods increased slightly by 08 percent and energy increased by 11 percent.

We now have industrial production lower than 22 percent compared to January 2014.To be frank, I was not expecting such a decline.

It is true that expectations were falling over the last few months, which meant a decrease in industrial production was predictable but I was so focused on the fight over the interest rate that I did not pay much attention to the possible developments in the real sector At the beginning of January I had predicted GDP growth close to 3 percent for this year This rather pessimistic forecast included positive GDP growth in the first quarter as well as those following. Now I am inclined to revise my growth forecast.

You may think it is too early for such a revision based on just one monthand#39s data but nevertheless, observing last yearand#39s industrial production figures I expect a GDP contraction for the first quarter In March 2014, industrial production jumped more than 10 points so under the current conditions it is highly possible that industrial production will not increase significantly over the next two months, allowing the realization of an aerse base effect. If this happens, it wonand#39t be possible to reach 3 percent GDP growth in 2015.

However, I must note that the economic policy that is utilized after the June 7 general elections will be decisive for the second half of the year this might be better or worse.What is happening in the economy? I have commented a lot on the low growth regime that has prevailed since 2012.

By the end of 2011 those responsible for the economic policies led by Deputy Prime Minister Ali Babacan decided to switch from a domestic demand-led growth to a balanced growth based on both the contributions of net exports in addition to domestic demand. The very high growth based exclusively on the domestic demand had caused a notably high and unsustainable current account deficit (CAD).

GDP growth rates in the medium-term had been planned at 5 percent, reflecting the estimated potential growth of the economy.I fully agreed with this approach but 5 percent has been never reached.

The average GDP growth stabilized at close to 3 percent over the last three years while the CAD could have been lowered from 10 percent to 6 percent. The main reason for this failure, I believe, was the postponement of structural reforms, particularly in the tax system and labor market.

This postponement constituted an obstacle for productive investment. The contribution of the total factor productivity to the economic growth has been null over the last years.

At the same time, the central bank and Treasury took measures to lower the domestic demand increase. Finally from the demand side, domestic demand growth slowed down more than expected and the contribution of net exports became just slightly positive.

As the investment continued to stagnate the growth rate could not be reinforced.Over the last few months even this already weak economic status has been threatened.

Exports have decreased in the last two months as well as consumer and company confidence indexes. We do not yet know if the turmoil in the financial markets caused by fights over the interest rate would have entailed damages on investment behavior but most likely they would have.

To sum up, the economy has become unpredictable as a side effect of the impending general elections. These days a meeting is expected to take place between the president, deputy prime minister and the central bank governor I hope the meeting puts an end to the fight over the interest rate — the result could be for the best or the worst.

SOURCE: Today’s Zaman