Monday, December 15, 2008

Weekly Hurriyet Daily News Column: Growth likely to disappoint; not only today, but well into 2009

The unedited version of my column today is below. You can read the final version at Hurriyet's authors archive. As you'll notice, I have somewhat shifted gears, as my editors have asked me to have a Turkish rather than international focus. As always, comments are always appreciated; feel free to use the comments section of the blog or drop me an email at

As you are reading these lines, TURKSTAT – Turkish Statistical Institute, will be about to release, if they have not done already, the GDP – Gross Domestic Product- turnout for the third quarter of 2008 and employment statistics from August to October. We already know that the economy is slowing down fast, but as always, the devil will be in the details. More importantly, the fourth quarter will end up being much worse, as my favorite key indicators of growth, released just before the Bayram, attest to.

Two leading indicators of growth hint at tougher times ahead

Industrial production is widely used in Turkey as a leading indicator of growth by economists, and the dismal October figures released on December 5 hinted of a sharper slowdown in the fourth quarter. It is never wise to make too much of one month of data, but the November capacity utilization numbers, also released on the same day, suggest that the weak trend in industrial production is likely to continue. Moreover, the weakness in industrial production is across the board, as the slowdown has spread from sectors that depend on domestic demand to more external sectors since the end of the summer, when the first signs of the slowdown emerged- see my blog entry tomorrow for more on this.

The details of today’s growth release are likely to reveal that growth in the third quarter has mostly been a product of Turkey’s internal factors. But with the developed countries slowing down fast, Turkey has started to feel the effects of the pullback in global demand in the last couple of months. In this respect, TURKSTAT trade volume indices, also released on December 5, show that both exports and imports are sharply contracting. While TURKSTAT also releases trade figures, the indices, free of price effects, paint a more accurate picture for the real economy, and therefore while usually overlooked by economists until now, they are likely to be followed more closely in the future. Again, we should not make too much of one month of data, but for now, the data tell us that not only external demand is unlikely to contribute to growth significantly in the fourth quarter, the continued contraction in capital and intermediate goods imports paints a discouraging picture for growth going forward.

To contract or not to contract, that is the question

Looking forward, while most economists are expecting a small positive growth between 0 to 1 percent in 2009, negative growth can not be overlooked, either. At the end of the day, we are likely to see that our fate is increasingly taken off our own hands and tied to the fate of the global economy. The trillion dollar question everyone is asking is whether the US economy is about the hit bottom and is likely to recover in 2009 with the help of Fed’s quantitative easing and the fiscal stimulus (see my column of two weeks ago for more on this). If that is the case, Turkey may indeed end 2009 with small positive growth, with the economy starting to show signs of recovery in the second half of the year. But if you agree with Dr. Doom (NYU professor Nouriel Roubini who has so far been essentially right in predicting the global crisis) that even tougher times are ahead for the world economy, you should not be surprised to see Turkey grow less than -1 percent next year.

But the fact is that, negative growth or not, the Turkish economy is to grow significantly below its potential, not only this year, but also in 2009. In this challenging outlook, we are looking for a tough year for the Treasury and the Central Bank. This is where I will pick up next week.

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