Growth will not fall down steeply as it was once feared. 3-4 percent quarter-on-quarter growth ago seems more probable.

Growth figures for 2011 were finally announced. With the 8.5 percent growth rate as of the end of 2011, the economy achieved high growth in two consecutive years. Given that the average growth rate for the 1960-2011 period was 4.5 percent, 2011 growth becomes even more remarkable.

What pleases economists is not high growth achieved in a given year but a high sustainable growth rate. Unfortunately, we all know that the rates achieved in 2010 and 2011 are not sustainable. There are two straight answers: first, the economy had high current account deficits in both years, especially in 2011, and the deficit was financed via short term FX borrowings. Such a high level of current account deficit is unsustainable as no one will be willing to continuously lend to a country with high current account deficit.

The second reason relates to average growth rates I mentioned on top. Turkey achieved high growth rates before. For example, the growth performance in the 2004-2005 period was almost the same with that in the 2010-2011 period. The high rates of growth could not be sustained, however. What is more, in the 2004-2005 period current account deficit in proportion to national income was much lower than that in 2011 and was mainly financed via long-term FX borrowings. In other words, back then, high growth was much more sustainable than it is today.

Liquidity abundance

Of course, any “unsustainable performance” can be sustained for a certain period. The main matter of debate for 2012 is for how long the unsustainable can be sustained anyway. We all know that the main driver of high growth was the liquidity abundance in global financial markets. The Fed of the US which caused the abundance declared that the status quo would be preserved at least until 2014. Than the European Central Bank put an additional €1 trillion on the liquidity stock with four-year maturity. Though the mood was disturbed lately, the mentioned developments brought a more optimistic mood in the second half of 2011. This implies a limited recovery in the global risk appetite. Therefore, the risk that the unsustainable case of Turkey comes to a halt as liquidity shrinks became less probable. Now the basic scenario is that the unsustainable evolves into a “less unsustainable” case. That is to say, growth will not fall down steeply as it was once feared. 3-4 percent quarter-on-quarter growth ago seems more probable.

Fall in exports

The contribution of the gross domestic product (GDP) items to growth is also interesting. In the last quarter of 2011, the economy grew year-on-year by 5.2 percent. The contributions of domestic demand and foreign demand were 2.4 points and 3.2 points, respectively. The contribution of foreign demand was higher not because exports boomed but because imports shrank. “Imports of goods and services” under the GDP was in decline concerning the pace of annual growth. In the last quarter of 2011, the value of the import account also dropped. Coupled with the fall in the pace of increase of domestic demand, this is a severe signal of economic slowdown.

More recent statistics also signal that the economy in fact is slowing down. Import of investment goods diminished considerably. The leading indicators announced by the Central Bank also validate this. Weekly increase in Lira and FX loans in eight-week averages is not as “extreme” as it had been during the first half of 2011. For example, average weekly increase in lira loans (last eight weeks) was 0.58 percent during the first half of 2011 and 0.26 percent for the period since the beginning of 2012.

This commentary was published in Radikal daily on 03.04.2012