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    An amusing debate

    Fatih Özatay, PhD05 July 2012 - Okunma Sayısı: 1014


    In 2012 Turkey can achieve 4 percent growth as targeted in the Medium Term Program, which is in harmony with my expectations for soft landing.

    “Hardness” and “softness” are relative concepts. When the gross domestic product (GDP) figures for Q1 were announced, an amusing debate that had been shelved for some time came back on our agendas: will Turkey experience the economic slowdown as “soft landing” or a “hard landing?” Some of you might ask “why does it matter if it was hard or soft when the economy will eventually land?” And you are right. In Q1 2012 the economy grew by 3.2 percent compared to the impressive 11.9 percent in Q1 2011 and there is an evident “landing.” 

    Potential growth rate
    I would like to draw your attention to something so as to put an end to the soft vs. hard abstraction. Economists take the potential growth rate as given. It is not because improving the potential growth rate is unimportant. It is because it takes long time to fulfill the steps to change (to increase, in this case) the potential and because the yields become visible only in the medium and long run. With this perspective, they wish that growth rate stands close to the potential as critical problems will appear otherwise. For example, if growth rate is significantly below the potential, high unemployment arises. Or if growth rate is substantially above the potential, there emerges high inflation and in countries like Turkey high current account deficit, both of which escalates economic vulnerabilities.

    Therefore, if growth first diverts from and then converges to its potential, this implies a “soft” transition process. Similarly, a slowdown from strong growth to potential growth also can be called a “soft landing.” Concerning the hilarious debate going on, the potential growth rate can serve as a reference point. Please let me remind that Turkey’s potential growth rate floats between 4 and 4.5 percent.

    If you agree with the above framework, we first have to estimate 2012’s growth rate in order to decide if the landing was soft or hard. In the first quarter, the economy grew by 3.2 percent and domestic demand by less than 1 percent. There are a number of signs indicating that second quarter’s economic performance will not be much different from first quarter’s. Therefore, it will be the export performance that will determine how second quarter will differ. I am planning to analyze this issue with another commentary. For now, let’s assume that growth in the second quarter will be the same with that in the first quarter.

    Please note that if Europe does not go into chaos again, growth rate in the second half of 2012 will be higher than that in the first quarter. There are a bunch of reasons. First one is mathematical: as growth in the second half of 2011 was lower than that in the first half, the basis effect for 2012 will be strong. Second, the pace of credit growth tended upwards lately. Third, the Central Bank of Turkey has been lowering the average funding cost (overnight monetary policy rate) for some time now. Moreover, inflation outlook is positive, if the recent upward trend in oil prices ceases. Therefore, overnight policy rate might be lowered further.

    In conclusion, in 2012 Turkey can achieve 4 percent growth as targeted in the Medium Term Program, which is in harmony with my expectations for soft landing.

    This commentary was published in Radikal daily on 05.07.2012