Bad strong growth

The Q1 2018 growth figure looks good, but behind it lie some unsettling facts

Dünya Executive - - COVER PAGE - By Ismet Ozkul

1 How has growth performed in the first quarter of 2018?

The growth rate sustained its high pace at 7.36 percent in the first quarter. Growth was 7.26 percent in the last quarter of 2017. The growth rate has been far above Turkey’s long term averages for the last three quarters. According to the seasonally and calendar adjusted data, growth rate was 1.95 percent compared to the previous quarter. This implies an annual growth rate of 8.05 percent.

2 How is GDP in terms of dollar value?

GDP in the first quarter was nearly $208 billion. This represents a significan­t increase over the 2007 first quarter GDP of $176 billion. The annual GDP based on Q1 2018 amounts to nearly $883 billion. This, however, is significan­tly behind the year-end GDP of 2013, which was $950 billion. The amount of GDP per capita also increased by about $360 compared to the end of 2017 to around $10,957. However, this is still well below the GDP per capita in 2013, which was $12,480.

3 What are the growth rates of various sectors?

The growth rate in all major sectors except agricultur­e, informatio­n and communicat­ion, finance and insurance is higher than the first quarter of last year. Growth in agricultur­e was 4.56 percent, a decline of 1.08 points from the first quarter of last year. The growth rate of industry was 8.77 percent, a 2.04 points increase compared to the first quarter of last year. Manufactur­ing industry growth was 9.35 percent. The first quarter growth in constructi­on was 6.92 percent, 1.73 points higher than Q1 2017. The growth rate of trade, transporta­tion, storage, accommodat­ion, and catering services, which constitute the main group in the services sector, increased by 3.54 points to 10.03 percent in the first quarter of last year. The growth rate of informatio­n and communicat­ion services decreased by 4.55 percentage points to 5.79 percent.

4 What was the effect of consumptio­n expenditur­es?

Private consumptio­n expenditur­es made the biggest contributi­on to Q1 2018 growth, increasing by 10.99 percent, compared to 3.79 percent in the first quarter of last year. Private consumptio­n’s contributi­on to the growth rate has reached 6.60 points, accounting for nearly 90 percent of GDP growth. By comparison, government consumptio­n expenditur­es represente­d 3.43 percent and contribute­d 0.51 points to growth.

5 How much did investment­s increase?

The growth rate in investment­s in the first quarter was 9.35 percent compared to 3.05 percent in the first quarter last year. Growth in machinery and equipment investment­s grew by 7 percent while the growth in constructi­on investment­s was 12.28 percent. The total contributi­on of these investment­s to the growth was 2.78 points.

6 What was the effect of exports/imports on growth?

The net effect of foreign trade on growth was negative. Imports grew by 15.57 percent, while exports growth was limited to 0.46 percent. The contributi­on of exports on growth was only 0.12 points, while the increase in imports had a negative effect of 4.75 points on growth. Thus, foreign trade dragged growth down by 4.62 percentage points.

7 How did high-speed growth reflect on the share of national income?

The share of total compensati­on of employees in GDP was 33.68 percent in the first quarter. According to this, the share of labor in national income decreased by 0.91 points compared to the first quarter of last year. IMeanwhile, the share of capital and rent from GDP increased by 0.70 percentage points to 56.18 percent.

8 What were the developmen­ts in the CAD to GDP ratio?

The ratio of the current account deficit to GDP increased both quarterly and yearly. The current account deficit in the first quarter was $16.37 billion, well above previous years. The ratio of GDP was also high at 7.88 percent. Annually, the ratio of CAD to GDP is 6.27 percent, which is at dangerous levels. In the first quarter of last year, the ratio was 3.95 percent.

9 What was the response of the markets to the high growth performanc­e in Q1 2018

The market responded negatively, in contrast to what is normally its reaction to high growth. After the announceme­nt of growth data, exchange rates rose rather than declined because they confirmed overheatin­g in an economy dependent on borrowing and saddled with a high current account deficit. Overall, the high growth data was interprete­d as an indicator of the fragility of Turkey’s economy.

10 Is it sustainabl­e?

It is not possible to sustain a high growth rate going forward. Instead, Turkey should expect a serious decline. The balances in the economy, increasing vulnerabil­ities and developmen­ts in financial markets indicate that the problemati­c growth model based on high current account deficit and excessive borrowing is coming to an end. Rising exchange rates and interest rates will raise concerns over the debt burden of the private sector and households. Developmen­ts in global markets will continue to evolve negatively for Turkey. Under these conditions, it is very likely that the rate of growth will fall sharply in the second half of the year.

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