2019 is critical

The 5.2 percent growth rate in the second quarter is not a bad performance if you think about the troubles in the economy and the fragility in world affairs. On the other hand, if you look at the growth figures of the second half of 2017 and the first quarter of 2018, you can see that the growth rate in the second quarter this year reflects a significant loss of confidence in the economy. At this point, I think we need to answer two questions: What are the reasons behind the slowdown? And what comes next?

Let’s first look at what happened. The growth rate in the first quarter of 2017 was 5.3 percent. There was a similar growth rate in the second quarter. Growth in the next three quarters was a jump: After a rate of 11.5 percent in the third quarter of 2017, the economy grew by more than 7 percent in two consecutive quarters. Obviously some growth-friendly factors stepped in in these three quarters. At the end of the first half of 2018, there were general elections. Politics had its effect in an election environment.

Continuing with a politics that provides widespread financial support and abandoning fiscal discipline for more than three quarters will inevitably have serious effects on the economy. The first of these effects and, of course, the most important is that monetary expansion supercharges growth by expanding total demand. We know that the main impetus for giving money during an election process is to attract people’s votes rather than to care for the welfare of the people.

Attracting votes with the monetary expansion have three more impacts on the economy. The first effect is related to public balance. The source of the spending increases has to be the public sector. Therefore, the monetary expansion in the electoral process ultimately distorts the public balance, increases the public deficit and increases the need for public borrowing. The second effect is the increase in prices and the acceleration of inflation as a result of the injection of money spurring demand for goods. The third effect is the increase in the external balance - the growth of the current account deficit.

I believe that therein lies the dampening effects of these factors behind the significant slowdown in growth in the second quar- ter of 2018. With the conclusion of the election, the need for pulling votes with monetary expansion has largely disappeared. The loss of monetary expansion has reduced the support behind growth and thus the performance of the economy has deteriorated.

From this point on, the question is what happens next. It will be necessary to reverse monetary expansion with appropriate policies designed to repair the damage and carry those policies over to 2019. Otherwise, a breakdown in the Turkish economy and a new crisis is inevitable. We must admit that it is unlikely that 2019 will be a “year of economic repair” if we consider that it is another election year. I do not think it would be wrong to think that 2019 could be a year of recession under these conditions.