3.8 percent GDP growth fizzles out
We hoped to give the economy a dynamism and achieve a new acceleration by changing the name of the Medium Term Program to the New Economy Program. But it seems that’s not what is happening. Changing the name of a soccer player without teaching him new skills will not make him play any better.
There were three headlines in the New Economy Program: “Rebalancing, discipline, change.” Rebalancing meant a reduction in the volatility of the economy as much as possible, especially the volatility in the foreign exchange rate. That was achieved to a great extent and the foreign exchange rates decreased to unprecedented levels at the time the New Economy Program was released. More importantly, a trend - a horizontal one – was achieved too.
Another pillar of the rebalancing phase was to cut growth prospects to reasonable levels. Everyone knew about the side effects of a very high growth forecast, and I mentioned this issue in my previous columns. During times of high growth, our current account deficit first and foremost climbs. And now, there was also high inflation accompanying high growth.
It was obvious that the growth rate in the second half of the year would not be like the first year half. In addition, it was clear that reducing growth was better for the economy as a whole. The Turkish economy grew by 6.2 percent in the first half. The GDP growth rate was estimated to be 3.8 percent for the whole year. In other words, it was assumed that the economy would grow by 1.8 percent in the second half.
A reminder: second half GDP growth estimations can’t be made simply by looking at first half growth relative to the growth rate estimation for the whole year. This calculation has to be made using absolute values to be accurate.
To extend the soccer analogy: the technical director, or directors, of the economic management team, were looking for a draw when they estimated 3.8 percent GDP growth for 2018 after a growth rate of 6.2 percent in the first half. In practice, they decided to kill the clock by estimating a 1.8 percent growth rate in the second half.
A team playing for the win would try to carry 6.2 percent growth through the whole year. But it is dangerous to force the players too much as they may experience serious injuries. Therefore, the team should kill the clock in the midfield until the end of the year by avoiding any trouble in the second half. There is always a risk of conceding a goal by counterattacks if you keep trying to score.
But in our case, while killing the clock in the midfield, we have given up goal after goal. It seemed impossible to close the year with a growth rate of 3.8 percent. To encounter all the goals was difficult but we had to keep trying to close the gap.
The coach played all his cards and his best players were out there on the pitch. The team attacked with all its power. There were tax cuts, previous tax reductions were extended, foreign currency contracts were banned and the fight against inflation program was launched.
The “discipline” pillar of the New Economy Program was kind of in the shadows but there was not much to be done. An all-out attempt was made to score a goal or two before the final whistle.
Instead, things have gone so badly that it seems impossible now to achieve 1.8 percent growth in the second half. A lot of institutions already estimate a contraction as of the third quarter, meaning the growth rate for the whole year has already fallen under three percent.
If the Turkish economy doesn’t grow at all in the second half, the 2018 growth rate will be 2.8 percent. If the economy contracts by one percent, the annual growth rate will be 2.3 percent. If the contraction reaches two percent, the annual growth rate will be 1.8 percent. Let’s see what the final score will be.