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It’s not only inflation that is stiff
The outlook of unemployment in Turkey is same as that of inflation. The mean is stiff, and we cannot overcome it permanently.
Labor force statistics for September were released yesterday. Employment rate (share of the employed in the working age population), started to rise after the crisis but this trend ended in April. Currently employment rate stands slightly below 46 percent. Unemployment rate, on the other hand, demonstrates an upwards trend in line with expectations. Seasonally adjusted unemployment rate achieved its lowest in mid-2012 with 8.9 percent and it has been increasing since then. The upwards trend was at first undulating but has been in a stable increase since February. Unemployment rate finally reached 10.2 percent in September. Unfortunately, this was the customary level for Turkey before the global crisis. In short, we have gone up hill and down dale, and finally regressed to the mean. From this perspective, the outlook of unemployment in Turkey is same as that of inflation. The mean is stiff, and we cannot overcome it permanently.
This is not the only commonality between unemployment rate and inflation. Both are relatively higher in Turkey than in rival economies. Let’s focus on the BRICS (Brazil, Russia, India, and China). No data is available for India. The average figures for 2003-2012 are 8.7 percent in Brazil, 7.2 percent in Russia, 4.3 percent in China, and 10.8 percent in Turkey. Turkey’s position does not change much when we add some more countries to the list. Over the mentioned period, Argentina, Chile, Hungary, Mexico, Romania, and South Korea had lower unemployment rates compared to Turkey, within an interval of 3.5 percent and 10 percent. The overall average for these nine countries excluding Turkey is 6.9 percent. Of course there also are morale boosters: South Korea (24.7 percent), Poland (12.4 percent), and Colombia (11.9). Oh, and there are two critically important examples which validate how the Turkish economy is doing miracles. And they are developed economies! There is no way I am skipping them. For the sake of intensity – consolation, more correctly – I will give the rates for 2012, when the two had the highest unemployment rates of all times: Greece with 24.2 percent and Spain with 25 percent. These are the candidates at hand. You may pick whichever one you like for comparison. Enjoy!
Last week balance of payments figures for October were released. I don’t want to go into detail. I will just focus on the change in net capital inflows. The reason why I am so “picky” at this is that the initial impact of the Federal Reserve’s expected decisions on Turkey will be a drop in net capital inflows. The magnitude of the fall depends on the size and the timing of tapering as well as the perception of the markets.
Monthly average of net capital inflows to Turkey was $10.7 billion in the first four months of 2013. The lowest level of inflow was in February; yet it was as high as at $7.9 billion. When the FED signaled the possibility of tapering, net inflows declined considerably, by $2 billion on average per month in the May-September period. In July, net capital outflow was experienced. With the markets have settled down a bit, net capital inflows increased in October, though the level is still lower than the first-quarter average: 6.5 percent.
The level of net capital inflows is important for at least three reasons: first, it shows the ceiling of foreign borrowing opportunities for banks and large corporations. Second, there is a close relationship in the same direction between the cycles in domestic credit growth and net capital inflows: any fall in net capital inflows puts a pressure downwards on credit growth rate. Third, any fall in net capital inflows imply hikes in exchange rate and interest rate, and vice versa.
This commentary was published in Radikal daily on 17.12.2013