Fund inflows towards Turkey have been rising. Should these circumstances prevail, 2012 growth can be considerably above the official estimate, 4 percent.

Readers continue contributing to the discussion on a new institutional regulation as I recommended in the last commentary of “the search for a new monetary policy” series. I will address those on Saturday. The day before, industrial production in December was announced. So today, taking departure from the data, I want to go back to growth forecasts for 2012.

In 2011, industrial production picked up year-on-year by 8.9 percent. Annual year-on-year increase in industrial production was 13.1 percent in 2010. However, recent developments in industrial production are of higher importance as it will give us preliminary information about growth prospects in 2012. I will put it straight without overwhelming you with numbers: Pace of increase in industrial production did not change significantly in the last quarter of 2011 apart from a slight deceleration.

In the mentioned period, global financial markets had been dragged into chaos once again upon the developments in the European Union, and risk appetite had decreased with a fluctuating course. The Eurozone leaders had failed to solve their deep problems and the European Central Bank (ECB) had been reluctant to introduce short-term measures that would save the day had escalated the pessimism about 2012. The possibility of a sharp drop in international fund flows in particular had been quite likely. Therefore, growth prospects for 2012 had been lowered throughout the world. The latest example was that the IMF revised its growth forecasts for 2012. The IMF currently expects 3.3 percent world growth, 0.7 points lower than the rate estimated in September 2011.

Credit demand and supply had decreased during the late 2011, due to the raise the Central Bank of Turkey had introduced in interest rate, the deep crisis across the Eurozone and the measures the Banking Regulation and Supervision Agency had introduced in June. Moreover, the state of affairs across Europe had raised concerns about the export performance of Turkey in 2012. This was the general picture when growth projections for 2012 were made.

Earlier on September 13, 2011, I talked about two basic scenarios for 2012 growth. The first scenario assumed that it would be Fed policies that will determine the global outlook in 2012 and that the European crisis would not intensify further. “If the Fed introduces a new quantitative easing”, I said, “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.”

The second basic scenario assumed that the intensification of the European crisis had been growing and balance sheets of banks would deteriorate in many European. After discussing some possibilities, I argued “...the economy contracts and unemployment escalates. A new quantitative easing by the Fed might limit these risks to some extent.”

In following commentaries, I mentioned some sub-scenarios. I revised scenario 1 with a more optimistic approach and discussed under what circumstances scenario 2 could turn less pessimistic. I concluded that scenario 2a, in which the crisis in the Europe deepened and Fed continued with the low-interest rate policy, was more probable and estimated 2012 growth between 1 and 3 percent. 

Growth might go beyond 4 percent

By the end of December, a series of decisions were made about the crisis in the Eurozone. The ECB stepped in and transferred substantial amount of funds to banks. The FED signaled a new quantitative easing. Risk appetite has been decreasing steadily since January. Moreover, fund inflows towards Turkey have been rising. These developments point at a picture similar to the one drawn in scenario 1. Should these circumstances prevail, 2012 growth can be considerably above the official estimate, 4 percent. The million dollar question again: Will these circumstances prevail? I do not know. But there is one thing I am sure of: we might be talking about the risk of economic contraction next week and the possibility of 5-6 percent growth two weeks later. Uncertainties prevail. Unfortunately, Turkey’s growth performance depends on the “mood” of foreign investors.

This commentary was published in Radikal daily on 09.02.2012