Today I am interested in the future growth performance of Turkey. At the first stage, I will focus on recent data and try to find out whether or not there will be a significant difference between the first and the second quarters. My objective is to estimate the pace of growth in the second quarter in comparison with the first quarter and than try to make a comment on the performance in the second half of the year.

Let me start with an indicator that maintains a positive course: The amount of credits extended by banks, net of inflation, has been increasing continuously since April 2009. The level attained as of the end of May exceeds the pre-crisis level. In the first quarter of the year, real amount of credits rose compared to the previous quarter. As of the end of May, pace of increase in comparison with the quarter before furthered. Credit expansion must have made a significant contribution to the pace of growth in the first second quarter of the year.

Despite the favorable outlook of the real amount of credits, net amount of foreign credits banking and corporate sector accessed is still negative. To put it differently, the mentioned sectors are net foreign debt re-payers as of April 2010. Corporate sector in particular transfers substantial amount of funds abroad. This negative phenomenon of the first quarter remained intact also in the second quarter.

At this point I should remind that almost a year ago a regulation that facilitates banks' extending domestic credits in foreign exchange terms was introduced. The impact of this regulation can be in the direction of expanding the volume of domestic credits and reducing that of foreign credits. In that case, the positive move in terms of real amount of credits might not be 'that positive' and therefore the data on net foreign funds might not be 'that adverse'. Nonetheless, we can suggest that the net impact was in the direction of improving growth in comparison with the first quarter.

And now the export performance: The most recent data is for May as announced by Assembly of Turkish Exporters (TİM). The data gives export volume in Dollar terms; so we cannot see exports net of the impact of the volatilities in Euro-Dollar parity. In Dollar terms (net of seasonality) export average in April and May is quite high compared to the average in the first quarter. So, we can suggest that exports, too, made a positive contribution to the pace of growth in the second quarter.

So, how about the confidence in the economy? There exists a close connection between private sector investments and real sector confidence index announced by the Central Bank. As the index reveals, confidence improved continuously over the first four months of the year. However, confidence tended to fall over the last two months. Retail confidence index announced by TEPAV also indicated a similar movement for June. Nonetheless, we should expect that this negative movement in confidence indicators play an effect on the growth performance only in the second half of the year.

We also have capacity utilization ratios for the first six months of the year. According to this, capacity utilization rate increased in the second quarter compared to the first quarter. Such a course can be observed in any year. However, it appears that this year the rise cannot be explained solely by seasonality effect. Industrial production net of seasonality for the first quarter of the year was 2.6 percent higher compared to the last quarter of 2009. And production level in April is 2 percent above that in the first quarter. There appears a deceleration; however this impression can prove wrong with figures for May and June are announced.

So, what do all these suggest? We know that in the second quarter of the year, pace of growth will be high when compared with the year before. But this is not I want to highlight; I want to emphasize the pace of growth in comparison with the previous quarter. The recently announced growth rate was not favorable in this respect: Rate of growth compared to the previous quarter was only 0.15 percent. The indicators I addressed above imply it is most likely that growth in the second quarter will be higher. But how much? It is hard to tell at this stage. Industrial production figures for May will give hints about it.

On the other hand, such a pleasing comment cannot be made for the second half of the year. The reason for the deterioration in confidence indices is mainly the recent developments in the European Union. Things are not back on track yet. Therefore, the corrosion in the confidence in Turkey's economy can continue a bit longer. And this might have a negative impact on investments and consumption. What is more, measures implemented by European Union countries will have a negative effect on the growth performance, which will in turn affect Turkey's exports adversely. In short, we are faced with the risk that peak level of production before the crisis cannot be re-achieved by the end of the year.

This commentary was published in Radikal daily on 05.07.2010