Growth stories
In the main article, I refer to the similarity – or lack of it thereof - between the American and Turkish growth sagas. Here, I delve into this in more
detail.
The prima facie case is there is no similarity. So, if we look at the U.S. growth graphic we can see that the ‘Trump growth’ looks exemplary. It is going up and up. I think the Fed is a long way from a stop in its rate hiking course, and not only because growth is rampant. This is another argument, and I will cut it short.
However, if we look at the year-on-year growth rates, the picture is blurred. Because American growth is measured quarter-on-quarter, seasonallyadjusted and annualized from that, it isn’t customary to look at the respective quarters of consecutive years. If one looks at Q2 2017 and compares it with Q2 2018 however, as we do here in Turkey, the rate of growth falls from 4.2 percent to 2.9 percent, and this is indeed a huge difference because, as a measure of trend growth, it lies below the 3.3 percent long-term average. Which is it then? I opt for 4.2 percent for policy evaluation purposes but because of Trump tax policy that supports corporate profits, it is a good idea too.
The key difference lies in private sector debt. The American private sector can invest if its profit goes up – it isn’t that indebted and it has a positive return on investments outlook – while here, all incentives go to covering already existing FX debt.
Now look at the Turkish case. If we consider ‘Trump tax smoothing’ as a direct incentive offered to the private sector, then the two stories are qualitatively if not quantitatively, comparable. Because 2017 growth was mainly due to the Credit Guarantee Fund, and because H1 2018 growth is mainly due to government expenditures and public banks’ lending at a high pace, both growth paths seem to be conditioned by government-induced stimuli that aim at shoring up corporate profitability. Absent such stimuli, the growth rates would have been much lower in the two countries.
This much is true perhaps but let’s look at the ‘sources of growth’. Whereas in the U.S. growth is due to intellectual capital, patent rights, service sector investments, and energy-shell gas private investments, there is nothing of that sort in Turkey.
In fact, investments are falling and are due to fall for a long time to come. We will see the imputed contribution of gross fixed capital formation to go down to near-zero levels for the foreseeable future.