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    Growth rate: Heads to where?

    Fatih Özatay, PhD13 September 2011 - Okunma Sayısı: 1082


    Growth performance was not surprising. Then, the "overheating" debates were intensified and the European crisis was yet to escalate.

    Gross domestic product (GDP) for the second quarter was announced yesterday. Turkish GDP increased by 8.8 percent year on year. Moreover, growth rate for 2010 was revised up from 8.9 to 9 percent and that for the 2011 quarter from 11 to 11.6 percent.

    The second quarter of the year witnessed the intensification of "overheating" debates. Domestic credit growth was buoyant. Lira depreciated within a controlled framework and hence supported exports which could not regain the pre-crisis performance due to unfavorable global circumstances. Moreover, then, the crisis in the Europe was not as severe as it is today and thus it did not pose a large threat that will affect consumption on durable goods at large quantities or investment decisions or expenditures compared to the quarter before.

    I have not stated any growth forecast at this column for a long time. Therefore, there is no sense for me to argue that the growth performance was in line with my expectations. But in the light of the developments I addressed in the above paragraph, I can say that the growth performance did not surprise me. And I believe that growth did not come as a shock for those who made the official estimations though the rate realized slightly above those.

    We can comment on the third quarter growth. The following are the monthly average increase in Lira credits: 0.35 percent in quarter 1, 0.69 percent in quarter 2 and 0.55 percent in July-August. In short, first two months of the third quarter were not very different than the first or the second quarter concerning the credit supply. On the other hand, the intensification of the European crisis by August and the repercussions of this development might have a negative effect on both the credit supply and the credit demand. In this context, we should expect that third quarter growth will still be high, though lower than the second quarter growth. But, it is quite difficult to estimate the fourth quarter GDP growth.

    Scenario 1: It will be the US that will determine the global outlook in 2012 unless the European crisis does not intensify further. It appears that Obama's new employment scheme will not be passed by the congress. In that case, the decisions of the Federal Reserve (Fed) will be determinative. If a new quantitative easing (QE) is initiated in September, fund (hot money) inflow towards countries like Turkey will increase, which implies that the rapid credit growth persists. Since the circumstances in the export markets of Turkey will perpetuate as per the above assumptions, no significance change in the export performance can be expected. If there is, an improvement, though limited, will be observed due to the increase in the exchange rate. Under these circumstances, growth rate will be above the potential and we continue addressing the current account deficit problem. I believe however that the realization of this scenario is least likely under the current circumstances.

    Scenario 2: The risk that the European crisis intensifies is growing. Risk perception against troubled European economies perpetuates and each they a new country joins the group of risky economies. This will gradually reduce the market price of the treasury bills of troubled economies. Therefore, we might expect that the balance sheets of banks deteriorate in many European countries, including Germany. This affects the credit supply in Europe negatively, which will push down the low growth performance further. In that case, Turkey's growth rate decreases since Europe receives almost half of the country's exports. Moreover, if the escalation of the crisis in Europe accelerates the search for a safe haven, countries like Turkey might face massive capital outflows in the event of which the credit demand and supply diminish and the confidence in the economy deteriorates. In short, Turkey encounters a climate similar to that witnessed during the global crisis: the economy contracts and unemployment escalates. Anew QE decision by the Fed might limit these risks to some extent.

    Both scenarios can be diversified. It appears that I will refer to this subject frequently in following commentaries.


    This commentary was published in Radikal daily on 13.09.2011