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    Growth: below the average in the next few years?

    Fatih Özatay, PhD09 July 2013 - Okunma Sayısı: 942

    Uncertainty is the nemesis of the confidence in an economy. It is not realistic to expect a rapid economic recovery in this environment.

    Yesterday industrial output figures for May were released. Here are some numbers: in the first five months of 2013 industrial output grew year-on-year by 2.1 percent. This is lower compared to 3.3 in the first five months of 2012. The picture becomes a bit brighter if we make the analysis over a shorter timeframe. In April and May, industrial output increased year-on-year by 3.3 percent, which is 2 percentage-points higher compared to the rate in the first quarter of 2013. In May alone, output growth was 2 percent, but we should not pay attention to this since observations based on a single month are likely to be unstable.

    There is another detail that requires attention, though: the figures reveal that weak growth performance has prevailed. The rates of growth since the beginning of 2008 were substantially lower compared to the long-term averages since 1950 and to the rates for developing and emerging market economies. In the five-year period between 2008 and 2012, Turkey’s GDP per capita increased only by 9.9 percent (in current dollars) compared to 32 percent in developing and emerging market economies.

    Unfortunately, apart from industrial output figures for the first five months and GDP figures for the first quarter there are signs that in the years ahead Turkey might not be able to achieve its average growth performance of last 60 years. Particularly when the US initiates monetary tightening and raises interest rates, it will be more difficult compared to the past for emerging market economies including Turkey to access foreign funds. Here, the past refers to the period after the crisis when rich countries generously injected liquidity. This process will eventually end and the liquidity abundance will vanish. Countries that are dependent on foreign capital inflows, Turkey one of the leading ones on the list, will sure be affected more severely.

    In the first quarter of 2013, Turkey grew by 3 percent, below the historical average but above estimations. This pleasant “surprise” was enabled mainly thanks to the contribution of public spending. Excluding this contribution, GDP growth falls almost to zero. Growth performance based on public spending is not sustainable given its burden on the public budget. The ideal case is that if private consumption fails to trigger growth, public spending steps up on a temporary basis as much as budget means allows and private consumption and investment retake the lead soon.

    Nevertheless, private investment expenditures have been in decline for the last four quarters and the rates of decrease were remarkably high in the last quarter of 2012 and first quarter of 2013. It is clear that we are living in a time of uncertainties. How long will interest and exchange rate hikes continue? How much will foreign fund inflows shrink? There is no straightforward answer to these questions. Uncertainty is the nemesis of the confidence in an economy. It is not realistic to expect a rapid economic recovery in this environment. That’s mainly why I think that growth rates in the next years will be lower than the 60-year average. If this estimation proves correct, unemployment rate will most probably stand around 10 percent.

    This commentary was published in Radikal daily on 09.07.2013