My basis economic scenario for 2010 and 2011 was the scenario of 'spinning'. On Thursday I briefly touched upon why it is most likely that the economy will spin: Level of foreign funds to flow toward countries like Turkey would be low. Recovery of foreign demand and thus of exports would take time. In the dawn of elections high rate of unemployment increased the risk of implementing inconsistent panic decisions. Though it was 'time to say something new', design incapacity could be expected to make us be stuck at the 'old'.

Let us examine the other factors that intensify the possibility of realization of the spinning scenario: First, early elections might come on the agenda anytime. Second, other problems that intensify day by day push economic problems out of the agenda. Third, we are still so far from understanding the main dynamics of Turkey's economy. For instance, we somehow fail to acknowledge how the inability to construct 'confidence' climate can turn around the results listed in the first chapters of economics textbooks. As we fail to acknowledge this, we make more serious mistakes. The scenario has two determinant factors. First, how the global financial crisis will be shaped from this point onwards is important. We always maintain it is a high possibility that the worst part of the crisis has ended. But after all, this is a possibility; I may not necessarily come true. Second, if an agreement is reached with the IMF inconsistent panic decisions will not be made. But the question is that those who have a tendency to make inconsistent panic decisions would not have made those decisions in the first place if they had known those were inconsistent. Most probably they will think that those decisions are necessary as they will once more miss the importance of the 'confidence' factor I mentioned above. In that case, if they believe that the IMF will not let them make 'necessary decisions' why would they reach an agreement with them?

In short, it appears as a high possibility that the spinning scenario will be realized and thus lower growth compared to the possible rate to be achieved when solid steps are taken will be achieved in 2010 and 2011.

For the last couple of months it is emphasized that the volume of inventories in the economy has fallen down to very low levels. It is also pointed out that the re-accumulation of the inventories will have a positive impact on growth in the forthcoming period. It is obvious that the volume of inventories will have a positive impact on 2010 growth; let us examine the inventory issue: The level of inventory a firm will be willing to keep depends on a couple of factors: First one is of course the estimation for sales. If the firm thinks it will sell one thousand cars and will keep an inventory of fifty cars; the inventory it will not keep under the assumption that it will sell five hundred cars will not be the same. On the other hand, the volume of inventory calculated based on the level of sales will be also affected by the volume of credits obtained from banks as operating capital and the interest rate imposed on the credit. If the interest on the credit is high, volume of inventory will decrease.

Now, this is the case: Firms made production in line with the sales plans made at the beginning of 2008. Then as of August 2008, both domestic demand and foreign demand have evaporated. Firms were left with and undesired inventory volume. Thus, they cut down production further and met a certain proportion of existing demand via inventories; inventories were depleted.

There is no doubt that if they wish to raise inventories back to old level they will produce more than they will sell. And this will have a positive impact on the pace of growth. But, on what grounds they will accumulate inventories now? Initially on grounds of the expectation that domestic and foreign demand will revive and then of the ability to obtain credit to finance inventory costs. There is no sign of a revival in foreign demand. Let's say that domestic demand was slightly stimulated. How much rise in volume of inventories will this lead to? Moreover, in particular small and medium sized firms are faced with a significant problem considering access to finance. In brief, it is wise to not rely on a significant rise in volume of inventories and a considerable contribution to pace of growth.

This commentary was published in Radikal daily on 05.07.2009