Outlook on inflation
► I don’t yet buy the argument that nflat on w ll drop all the way to 13 percent. I mostly adhere to the v ew that n the second half of 2019 we w ll w tness a small recovery. Th s would largely be the result of base effects, surely not based on a p ck-up n nvestments.
► There s st ll as much as 10 percent of pent-up nflat on wa t ng for demand to rev ve. There s no way to cla m s multaneously that nflat on w ll permanently fall below 15 percent and that there w ll be pos t ve growth n H2. One must choose one of the opt ons here.
However, any recovery can’t be both strong and dec s ve. As I have expla ned n the F nanc al Corner, the two p llars of the economy are the hous ng and automot ve sectors. Both are st ll qu te weak. Th s s demonstrated by a drop n hous ng pr ces n January, wh ch measured negat ve 0.47 n the monthly Consumer Pr ce Index (CPI). The same f gure was 0.35 above zero n January 2018.
► Th s goes beyond food pr ces, but food pr ces are certa nly hurt ng. Inflat on has pushed the cost of food up by 6.43 percent n January alone, or 31 percent on an annual bas s. Th s nflat on reflects both the poor harvest and ever-weaken ng food product on, as well as mport pr ces. Yes, oddly enough, Turkey mports food.
► The graph cs show ng seasonally adjusted MoM and goods versus serv ces nflat on show the d rect on of nflat on. Clearly, as the exchange rate shock fades, weak domest c demand helps keep the d fference between D-PPI and CPI pr ces ntact.
► Barr ng any currency shock, nflat on w ll fall. By how much t can fall s another matter. From the looks of ts d ffus on, t appears that 15-17 percent by the end of 2019 s st ll a reasonable est mate.
► Suppose the 15-17 percent CPI target holds. Take 16 percent as the average and deduct 3 percent for the average nflat on of trade partners. Keep the real exchange rate constant. Roughly, you would add a 13 percent deprec at on to the basket. Keep ng the EUR/USD cross rate more or less constant, wh ch I also expect, you would come to c. 6 USD/TRY by the end of the year. Th s squares w th a GDP growth est mate of 0-1.5 percent. In th s scenar o, growth would occur mostly n Q4 of 2019, wh ch would extend to Q1 and Q2 of 2020 on the bas s of favourable base effects.
► Th s s the ‘as s’ or ‘muddl ng through’ scenar o. Of course, an IMF deal would alter the p cture drast cally.