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Risks ahead and growth prospects
Per capita growth rate in the last six years will be 1.85 percent compared to the 1950-2007 average at 2.72 percent.
A few years ahead will probably be challenging for Turkey concerning growth. There are many reasons strengthening this risk. The first one is well acknowledged: the series of steps the Federal Reserve (FED) is planning to take in the next three to four years. As a first step it will lower the volume of additional injections it has been carrying out on a monthly basis since the late 2012 and cease additional injections in the mid-2014. Later, according to the available information in 2015, it will raise the federal funds rate, but it will signal the time of rate raises well in advance. At the same time, it will be withdrawing the liquidity it previously injected. In this environment, interest rates in Turkey will fluctuate at a level considerably higher than what it was three months ago. One of the chief factors that enabled a significant pickup in growth shortly before and during 2010 as well as the second half of 2011 in Turkey was the ease of access to international funds thanks to the international liquidity abundance. Borrowing will not be as easy given the possible developments in the US.
Second, the interpretations that we once thought were pessimistic are today more likely to prove right: Chinese economy is demonstrating more and more signs of sluggishness. This is bad news for the world economy. Third, it is uncertain when the recovery in Europe will start. In fact, growth estimates for Europe have recently been revised downwards. Bad news concerning Turkey’s export performance. Fourth relates to the developments in Turkey’s neighboring region. Syria, Egypt and Tunisia in the background might trouble Turkey though this risk is not as strong as the first three. Finally the series of elections ahead are sources of risks for Turkey’s economy.
In the period ahead, Turkey might fail to develop the growth performance of the previous six years. Moreover, the cited growth performance between 2008 and today was weaker compared to not only the 1950-2007 average but also to developing and emerging market economies. I will assume that the official growth estimate for 2013 at 4 percent will be achieved. With this figure, per capita growth rate in the last six years will be 1.85 percent compared to the 1950-2007 average at 2.72 percent. Do not underestimate the difference of 0.87 percentage points here. If cannot be closed, the gap might grow quite large in the medium-term. For instance, if Turkey had growth at the 1950-2007 average in the last six years, GDP per capita could have been 5.4 percent higher. If the slow-growth episode continues for another decade, GDP per capita will be 14.9 percent lower compared to the case where the 1950-2007 average is achieved.
One of the key determinants of Turkey’s growth performance is the pace of private sector investments. Since the second quarter of 2012, private sector investments have demonstrated year-on-year declines. Central Bank’s real sector confidence index is an important indicator of investment appetite. In the second half of 2011 and during 2012, real sector confidence was weaker compared to the year before. The year-on-year erosion in confidence did not end until the last quarter of 2012 while it was fluctuant in the first seven months of 2013 although the magnitude of fluctuations was weaker. Therefore, real sector confidence has neither weakened further nor strengthened.
Available data suggest that private sector investment expenditures that decreased substantially in the twelve-month period between the second quarter of 2012 and the end of the first quarter of 2013 have not picked up considerably in the second quarter of the year. Given the risks reviewed above, it appears that private sector investments will not be strong in the next three years either.
This commentary was published in Radikal daily on 30.07.2013