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Hard landing is confirmed

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(Globalpost/GlobalPost)

The Turkish Statistics Institute (TurkStat) published 2012 fourth quarter and annual growth statistics yesterday. There is a surprise here.

TurkStat estimated a yearly growth rate at 2.2 percent. This is lower than the earlier forecasts that varied around 2.5 percent. One year ago, economists were intensely discussing whether the Turkish economy would experience a soft or hard landing. Everybody agreed that a landing of some kind was imminent since the domestic demand-led growth had reached its limit along with a very high current account deficit (CAD)-to-gross domestic product (GDP) ratio at 10 percent. To avoid the risk of a sudden cessation of capital inflows and a strict exchange rate adjustment -- which necessarily would have followed the sudden stop -- the government and central bank had decided to cool domestic demand and push the exports in order to have a relatively lower but balanced economic growth.

This new approach represented the soft landing scenario. A Medium-term Economic Program (OVP) for 2012 was projecting a 4 percent growth rate, into which net exports as well as a modest domestic demand would contribute more or less equally. During the first month of 2012, I thought like most of my colleagues, that a soft landing was possible. But when spring came, I had already joined the pessimistic camp, asserting that the growth would be lower than planned. In the summer, I wrote many times in this column that I expected a growth rate of lower than 3 percent. We now have a much lower one. We must admit that the landing has been hard rather than soft.

What happened? Simply, domestic demand has declined more than planned. Indeed, private consumption decreased by 0.7 percent and investments by 4.5 percent. Despite the positive contribution of public expenditures, the domestic demand over all contribution stayed negative. The bad performance of the fourth quarter has to be particularly noted. TurkStat estimates the quarter-to-quarter growth rate at 0 percent. Consumption and investments pursued their decreasing path during the fourth quarter. This means that the loosening of monetary policy did not produce the expected impact on the revival of domestic demand. The hopes are now postponed to the first quarter of this year.

The OVP still forecasts a balanced growth rate of 4 percent this year. The government and Central Bank expect the continuation of the positive contribution of net exports but also, contrary to last year's disappointment, a positive domestic demand contribution as well. Will it be possible? I am afraid that this time we risk coming back to our standard growth regime; that is, a domestic-led growth instead of a balanced one. Advanced indicators of the first three months point out a timid revival in domestic demand. Given the delayed impact of the easing of the monetary policy and the expected positive impact of the new investment incentives implemented in June 2012, I am rather optimistic about domestic demand revival, but not about the positive contribution of net exports.

During the first two months of this year, when foreign trade figures are seasonally adjusted, the cumulative increase of exports of goods during January and February shows a limited increase at 2.7 percent compared with the last two months of 2012, while imports show a high increase of 10.5 percent. These figures are not a good omen for the contribution of net exports to the GDP this year; if the gap between export and import increases persists, the contribution of net exports will be negative, for sure. The fact that the European market, still being the principal destination for Turkish exports, has stayed in a recession, does not give us too much hope for exports. They can continue growing in other markets, as they did last year, but it is not guaranteed that the total increase in exports can still surpass the increase of imports, as was the case in 2012.

I think the targeted 4 percent growth is still attainable, but it will not be a balanced one, for sure. Reaching 4 percent growth will depend on the intensity of the revival in domestic demand. The main handicap would be the possible ineffectiveness of the monetary policy. Monetary policy seems to be reaching its limit and I do not believe that further easing is possible. Thus, only fiscal policy remains. Nevertheless, fiscal discipline continues to be the red line for the government, given the persistent declarations of Deputy Prime Minister Ali Babacan and Finance Minister Mehmet Şimsek about the virtues of low budget deficits. But in politics, flexibility can overcome principles when elections are at stake.

http://www.globalpost.com/dispatch/news/asianet/130403/hard-landing-confirmed