Turkey’s economy is expected to grow at a steady pace in 2014. Domestic demand should be the main growth driver as the effects of the recent fiscal and monetary stimulus wane. With half of the population under 30 years of age, the appetite for consumption is formidable. Unemployment is high but falling. Increased inflows of FDI are needed to address external imbalances. The government’s inability to reduce the huge informal economy limits policy efficacy. Turkey has seen impressive growth in the past decade with per capita GDP tripling and the number of foreign firms increasing more than fivefold. The boom was driven by buoyant consumption and rapid growth in construction. All this was supported by strong job creation in both industry and services while labourers left the agricultural sector. Turkey's economic boom, however, was mainly predicated on a combination of foreign capital inflows, ultra-low interest rates, rapid credit growth and soaring asset prices.
The eurozone crisis, a doubling of interest rates and the impact of civil war in Syria were all drags on the economy. Exports still performed well thanks to a successful diversification away from EU markets and towards the Middle East. The economy accelerated modestly in 2013 but the performance was below historical trends.
The government's inability to make more progress in reducing the huge informal economy weakens the efficacy of policy makers. An estimated 53% of the work force was unregistered in 2004 and the share in 2010 was still about 44%. Policy makers have also been slow to boost competition in order to cut energy and other costs.
Real GDP is expected to grow by 4.0% in 2014, down from 4.1% in 2013. Domestic demand should be the main driver as the effects of the recent fiscal and monetary stimulus wane. The economy expanded by 4.4% in the fourth quarter in 2013, compared with the year-earlier period.
Prices rose by 7.5% in 2013 – well above the central bank's target rate of 5.0%. Inflation of 6.9% is forecast for 2014 but prices could rise further owing to a fall in the value of the lira. In January, the central bank announced a major interest rate hike from 4% to 10% to halt the currency's downward slide. The Turkish government has opposed the move.
With half of the population under 30 years of age, the appetite for consumption remains
healthy. In real terms, private final consumption rose by 3.6% in 2013. The same rate of growth is expected in 2014.
Unemployment was 9.7% in 2013 and it will dip to 9.4% in 2014. The percentage of jobless far exceeds the national average in rural areas and in the east where long-term unemployment is especially serious.
Turkey's work force is just 25 million – not much more than a third of the country's population. This is partly due to the youthfulness of the population but also structural factors, including a low participation rate among women. Unemployment among young adults is close to 25%. More than 40% of wage earners in the private sector report only the minimum wage – a situation that suggests a significant tax leakage.
Evaluation of market potential
Turkey is currently the world's 16th largest economy. The government's plan is for the country to become one of the world's ten largest economies by 2023, the centenary of the foundation of the Turkish Republic. However, the increasingly uncertain policy environment could weigh on the country's economic resilience and long-term growth potential.
Turkey must find ways to loosen the labour restrictions that inhibit employment in the formal sector and make more progress in educational reforms. Increased inflows of FDI are also needed to address external imbalances. More costly external finance will diminish economic prospects. If the current policy framework is maintained, the rate of growth will likely converge to historical trends, of about 4.5% per year.
Rising energy costs are another drag on growth that must be addressed. Electricity consumption is growing by 8-10% per year and that trend is expected to continue for two decades or more.
Half a million new jobs need to be created every year just to keep the number of jobless from rising. In some Kurdish regions in the southeast, unemployment is as high as 70%. Turkey's relatively youthful population could eventually provide a powerful boost to the economy if a sufficient number of jobs can be created. The number of young Turks is larger than the total population of many European countries.
Although their significance has increased over time, exports still represented just 18.6% of GDP in 2013. The export base is too narrowly focused, in terms of both its composition and destinations. In 2013, 38.8% of exports went to the EU. Basic manufactures together with machinery and transport equipment made up 57.4% of exports in 2013.
The value of exports tripled in 2002-2010. Exports (in dollars) declined by 0.4% in 2013 and growth of 8.9% is expected in 2014.
The current account deficit was 7.9% of GDP in 2013 and it will narrow to 7.7% in 2014. The deficit requires about $5.0 billion of foreign financing a month – overwhelmingly from short-term capital flows. This is mainly to pay for energy imports.
The business environment suffers from various weaknesses. These include the lack of a comprehensive legal and legislative system that protects the rights of foreign investors, an inflexible labour market, a low savings rate and a large informal economy. In an effort to improve the investment environment, the government is offering incentives to a number of industries including food, animal husbandry, greenhouse farming, leather, education, healthcare, drug-making, railways, sea transport and tourism.
The privatisation of various state-owned companies initially attracted a number of investors but many have lost interest as fears of an “economic bubble” have grown. The government is also experimenting with new forms of public private-partnerships to build hospitals and ports.
New laws are designed to expand the tax base to the unregistered economy. Personal income taxes have been simplified and extended. Social security has been reformed to better ensure fiscal performance. Excise taxes have been raised to meet the target for the budget deficit.