Fatih Özatay, PhD - [Archive]

Looking towards 2012 (4) 25/12/2012 - Viewed 1951 times

If growth rate remains around the potential rate at 4 percent, unemployment rate will be rigid at around the current 9 percent.

In 2013 the economic outlook might as well differ from the base scenario I have drawn previously, of course. So now it is time to set different scenarios. I will address the pessimistic one first as it might probably be realized earlier than the optimistic one.

External conditions under the pessimistic scenario: the risk of a fiscal cliff at the US is still valid. Successive meetings between president Obama and the Republican Party has to far proven unfruitful. Arriving at a fiscal cliff, the US will have to raise tax ratios and lower public expenditures limiting domestic demand before the economy has fully recovered will evidently harm the world economy, though it is not possible to estimate the damage precisely at the present.

The outcome of the pessimistic scenario: initially, we have to expect a remarkable decrease in global risk appetite, implying lower capital inflows towards Turkey and peers. This weakens the confidence in the economy, which coupled with the rising risks push up interest and exchange rates. The rises become steeper depending on the degree of risk aversion. Second, demand for Turkey’s export goods decreases as the interruption of growth in the US means sluggish global growth, especially given that European economy has not yet recovered. This implies remarkably slower growth and rising unemployment and inflation for Turkey.  Current account deficit eases due to the downturn in growth. The picture will probably be similar if the outlook of Europe evolves negatively.

External conditions under the optimistic scenario: in fact, my base scenario involves some “optimistic” elements already: US avoids the fiscal cliff. We should not expect conditions in Europe to evolve better than what the base scenario estimated. In this picture, the best possible option would be Europe and the world economy growing at a pace beyond what was estimated.

Let me make the scenario even more optimistic: assume that following Fitch, another credit rating agency upgraded Turkey to investment grade.

Under the optimistic scenario, Turkey’s export performance enhances. With the investment grade from a second agency, capital inflows towards Turkey increases and foreign finance opportunities for the corporate sector enrich. As a result, growth rate exceeds the potential, reaching at around 5 percent. This creates an upwards pressure on the value of lira. We should not expect a considerable change in inflation dynamics as faster growth puts an upwards whereas the appreciation puts a downwards pressure on inflation. Under this picture, current account deficit grows.

It appears that external conditions in 2013 will be better than they were in 2012, provided that the US avoids the fiscal cliff. We should expect a relatively higher growth rate compared to 2012. If the optimistic scenario is not realized, growth rate will remain around the potential growth rate at 4 percent, as a result of which unemployment rate will be rigid at around the current 9 percent. The scenarios do not take into account the upcoming elections. We could expect a rise in public expenditures in the second half of the year, which might have a positive effect on growth. But it is too soon to discuss this.

This commentary was published in Radikal daily on 25.12.2012