Drawbacks of the current deficit target

INCOME DISTRIBUTION IMPROVED IN 2021

The 2021 results of the Income and Living Conditions Survey, which was announced by the Turkish Statistical Institute (TurkStat) at the beginning of May, showed interesting results but did not receive enough attention. The research shows that income distribution in Turkey improved in 2021 compared to the previous year, the income gap between the 20% of the population with the highest income and the 20% with the lowest income decreased, and the Gini coefficient decreased to 0.401, indicating an improvement. However, the jump in inflation in the second half of the year, the increasing cost of living, the Life Satisfaction Survey announced at the beginning of February and the consumer confidence sub-indices, which are updated every month, fed the expectations for an opposite result.

(See graph: Gini coefficient)

ANNUAL CAD TARGET ACHIEVED IN Q1

We start this week with the balance of payments data for March. There was a current account deficit of slightly over USD 12bn in the first two months of the year. The monthly deficit may be around USD 5bn in March. Thus, USD 17bn will be reached in the first quarter. The new path, which began last autumn with the intention of high growth through low interest rates, high exchange rates, low imports, high exports and low current account deficit, has not yielded the expected results so far and many indicators, especially inflation, have weakened. The current account deficit is one of them. We will have reached the full-year current account deficit target of USD 18.6bn made at the last Medium-Term Program in the first quarter, and we will close the year with a deficit twice that, with an optimistic forecast. (See graph: Current

Account Deficit)

BIG PICTURE SHOULD BE LOOKED AT IN FOREIGN TRADE

Looking at events and reading data from a single point of view lies at the root of most of the misinterpretations made intentionally or unintentionally in Turkey. We see this situation frequently in the economy as well. Sometimes data with one improvement and four deteriorations is interpreted as a major improvement; sometimes, developments that are good in many respects but are only bad at certain points are interpreted as apocalyptic. Foreign data is often interpreted through this lens.

Recently, the expression “record in exports” is used in every foreign trade data statement. It is not wrong, as exports have gained momentum. But the word “record” should not prevent us from seeing the following facts:

- We are trying to increase exports by selling more goods at a cheaper price.

- The prices of the products we export are quite low.

- Exports are increasing rapidly not only in Turkey but also all over the world, and many countries are breaking records.

- Our imports are also breaking records. In fact, the increase in imports is much higher than in exports.

- Our imports are getting more and more expensive.

- The terms of foreign trade have declined to record low levels.

Foreign trade indices for March will be announced this Monday and we will repeat everything you read in the lines above.

ANY CHANGE IN HOUSING SALES

TurkStat will announce housing sales for April on Tuesday morning.

In the first quarter of this year, 320,000 houses were sold. Although sales are above 2021 levels, they are behind 2020. But that’s not what makes the housing market different from previous years. The most important point is that the share of new houses in total house sales in 2022 has decreased below 30%. The share of new residences in total sales was low in 2020 and 2021, but it fell to its lowest level ever in 2022. New homes accounted for nearly half of sales in previous years, and that is what makes the market dynamic. In the last few years, second-hand houses have had an obvious weight in sales. We will see this picture generally continuing throughout the rest of the year. (See graph: The share of new houses in total sales in Q1)