Microscope: Turkish economy 2013, By Taptuk Emre Erkoç
Turkey’s economy ended 2013 amid both promising macroeconomic indicators and heightening structural weaknesses. Enviable growth rates saw Turkey preserve its reputation as one of the fastest expanding economies in the world. On the other hand, a lack of consolidated political and economic institutions -alongside a fragile currency- interest rate regime -- led domestic and foreign investors to question the economy’s future trajectory
The current state of Turkey’s economy is somewhat unstable: At present it is unclear whether the economy will find stability in expansion or contraction. This piece critically examines the strengths and weaknesses of Turkey’s economic outlook, focusing on 2013 figures. The economic indicators comprising an existing synopsis of the Turkish economy are summarized and scrutinized, concentrating specifically on GDP growth rates, export and import volumes, public spending and debt figures, inflation, exchange and interest rates, and finally unemployment level.
There is no doubt that Turkey has been admired by competitors due to an increasing trend in GDP figures, even during the difficult period of the financial crisis in 2008. Figure 1 clearly illustrates that the Turkish economy’s expansion on a GDP basis continued throughout the first three quarters of 2013, despite a slight decrease in the third quarter. If this growth is broken down into its components by means of the expenditures approach to GDP calculation, its internal dynamics can be viewed. According to this particular analysis, GDP growth in Turkey is strongly motivated by government spending, the magnitude of which exceeds households’ total consumption. Therefore, the decision makers in the public institutions, alongside politicians in the executive body, need to be watchful regarding an apparent trend in growing public spending which would have dire consequences for Turkey’s public finance. The figures belonging to the third quarter, where a sharp decline in government spending was observed, give optimistic signals in that sense.
Exports and imports
One cohort of scholars in macroeconomic growth theory supports export-led growth policies for developing countries. Right at the beginning of the ruling Justice and Development Party’s (AK Party) first term in Turkey, the Turkish economy’s expansion in terms of GDP growth rate was stimulated by the export-friendly policies of the government, in line with the conventional wisdom mentioned above. Almost simultaneously, the amount of imported goods rose, thanks to periods of lower exchange rates. However, more recent statistics (as shown in Table 1) ring alarm bells as far as the trade balance is concerned, signaling insurmountable current account deficit records. While the trade deficit increased by 2.79 percent in January, it experienced a 37.31 percent rise year-on-year in December. Exchange rate policies, increasing costs in the domestic market, low-level technology in the production sector and changing attitudes in foreign policy, particularly toward Middle Eastern countries, can all be put forward as the driving forces behind this increasing gap in international trade figures. It is clear that Turkey needs to reconsider its current trade
balance status and initiate policies that will result in lower costs/higher quality goods by focusing specifically on technology (know-how) and R&D investments.
Public spending and debt
Another component of macroeconomic stability and sustainable growth is the amount of public spending alongside that of public debt. At the end of the day, “balancing the books” -- calculating and comparing public spending and income -- reveals the health of the economy. Fiscal discipline on the basis of fiscal rule stipulates certain conditions for spending decisions, as well as a limit to prevent overspending. In this author’s view, the Turkish economy’s strength even during highly turbulent times was tightly correlated to the success of its fiscal policy decisions. Thus the trend in growing public spending and public net debt stock presented in Table 2 and Figure 2 respectively could be considered a deviation from the fiscal discipline that assured financial investors and international regulatory organizations Turkey would no longer be a high-debt, overspending country.
Inflation, exchange and interest rates
Contemporary economic systems have three interwoven macroeconomic indicators: namely inflation, exchange and interest rates. A slight change in any one has an apparent impact on the remaining two, and the Turkish case is no exception. There is no doubt that the Turkish economy’s promising success during the last decade immediately influenced price levels, and the consumer price index stabilized accordingly. The policy-makers giving direction to the economic policies were extremely proud of the “one-digit inflation rates” achievement, and deservedly so. Figure 3 indicates that recent numbers for inflation rates preserve this legacy, with minor increases in December 2013 and January 2014. Inflation rates throughout 2013 ranged from 6 percent to 9 percent; such ebbs and flows may be considered seasonal effects. The most dramatic incident of the previous year was the US dollar and euro’s inexorable upturn despite the Turkish Central Bank’s interventions. The euro started 2013 at around TL 2.3, whilst the dollar’s value was TL 1.8. By the end of the year, the euro was almost worth TL 3.0 and the dollar was equal to TL 2.0, as indicated in Figure 4. This striking change in exchange rates was driven by contradictory monetary policies from the US Federal Reserve and the European Central Bank, as well as a downward trend in interest rates in TL deposits. Even though depreciation in TL makes Turkish goods cheaper vis-à-vis their international competitors, the imported intermediary goods spark rising input prices in the
manufacturing sector, which consequently has an inflationary pressure on goods in the medium term. The recent increase in interest rates on TL deposits may decelerate the pace of appreciation in the aforementioned currencies seen over the past year (see Table 3).
Sustainability in economic growth is mostly assured by more jobs and less unemployment. The Turkish economy again looks good on this count, with one-digit unemployment rates of around 9 percent. Although numbers exceeding 10 percent were recorded during the second half of 2013, the unemployment rate fell below 10 percent again after a three-month two-digit period. Figure 5 illustrates this trend, which occurred between January and October 2013. The highest increase in employment levels occurred in the construction sector, which added 100,000 jobs. Finally, the youth unemployment rate rose from 18.1 percent to 19.3 percent; more noteworthy than other unemployment rates, as its economic, political and social impact is far greater than that of other worsening macroeconomic indicators. The Turkish economy has experienced a very successful period in which it was among the fastest growing economies in the world, competing with Indian and Chinese growth rates. Increasing export figures, stabilized inflation rates and promising GDP growth combined to give a stronger and trustworthy economic outlook. However, recent developments both globally and locally left Turkey’s economy looking rather more fragile, reminiscent of the established “middle-income trap” faced by developing countries.
To overcome the economic traps Turkey faces today, the rationale of the economic policies behind the previous prosperous periods need to be revisited, and serious investment allocated to technological enhancement and R&D. In addition, policy makers in Turkey must recall that political stability and ensuring rule of law are indispensable for sustainable economic growth and development. When all’s said and done, economic performance is highly associated with the psychology of individuals -- including consumers, entrepreneurs and international investors -- which is susceptible to the adverse consequences of discretionary attitudes from political figures. Turkey’s aim of becoming a stabilized economy is highly contingent upon the microeconomic foundations of macroeconomic stability, including individuals, entrepreneurs and non-state actors.
Inflation rates throughout 2013 ranged from 6 percent to 9 percent. Here central bank head Erdem Başçı announces the January 2014 inflation report.
Increasing export figures, stabilized inflation rates and promising GDP growth combined to give a stronger and more trustworthy economic outlook.