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    Inertia of economic policy

    Fatih Özatay, PhD06 September 2010 - Okunma Sayısı: 1138


    If you are of belief that the market mechanism should not be intervened in and that the economy will reach the equilibrium in its own dynamics, you do not have to worry about the recent negative signals about economic growth. But we cannot say the opposite.

    That you do not worry about these negative signals does not necessarily mean that you believe the economy will eventually achieve the potential growth rate. It may imply that you are occupied with more 'divine' staff. It may be that you have the referendum and than the elections coming. It may be that you are planning to focus on economic decisions and ensure an economic buoy after the elections.

    But wait a minute. Do not you have the local elections right after the general elections? And than the presidential elections? You will still have important and divine things to deal with; so you will not be bothered with growth rate or unemployment rate in these hard days.

    It is most probably not this 'simple'. Maybe no one considers the signals as negative. Production rises and unemployment rate falls compared to the year before. Interest rates are low, inflation is low and exports have been recovering. Turkey performs better as also pointed out by some foreign analysts.  So, everything is on track.

    I do not know about you, but the existing economic policy inertia tangles me. I really wonder what the decision makers actually think. Anyway, let me take a quick look at the recent developments from my window.

    For economic growth, both domestic indicators and global developments reflect signals that can be considered negative. In that case, it appears that it is even not likely to achieve the potential growth rate which is generally considered to be low, in 2011.

    Real sector confidence index, which gives information on the tendency of the private sector to invest, is still at the positive zone. But confidence has been weakening significantly over the last four months. Turkish firms are net foreign debt payers for a long time due to the global crisis. Corporate sector borrowed more than the amount repaid for the first time in May, but this trend was not persistent. In June corporate sector was net foreign debt payer once again. This is a negative development for private sector investments. Also, consumer confidence which was announced last weak also give unfavorable signals.

    In August, capacity utilization fell considerably compared to the month before. This weak data on industrial production in July will be announced. Please note that in June industrial production (net of seasonality effects) dropped significantly compared to the month before.

    The determinant of the growth rate in 2010 will be export performance. However, data announced by Assembly of Turkish Exporters for August was not favorable enough: Exports increased compared to the same month in 2009; but this is not impressive given that volume of exports in August 2009 was quite low. What is more, compared to July, exports dropped significantly (though partially due to seasonality effects). In addition, export volume in August 2010 is quite below that in August 2008.

    Global developments are not favorable, too. Second quarter growth in the USA was revised down. Moreover, figures announced for the housing market and applications for unemployment benefits were less favorable than expected. In this context US economy is expected to grow below the estimations. Some also maintain that it is now a bigger probably for a new contractionary period.

    For the EU, who receives almost 50 percent of Turkey's exports, there are no pleasing developments about growth except Germany. In the second quarter Germany achieved an impressive growth rate; but this was driven mainly by exports. I said 'but' because if the growth was driven by domestic demand, it would be a pleasing development for Turkey's export performance.

    Thus, if I were you, I would worry about these developments.


    This commentary was published in Radikal daily on 06.09.2010