Monday, March 30, 2009

Weekly Hurriyet Column: Busy Week, quite a few surprises

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. I guess this is my most precise column to date, but you didn't need to be a genius what would come (or not come) from the G-20.

There is a busy domestic and international agenda next week, which could spit out quite a bit of surprises.

Inflation could go for another upward surprise on Friday, as my own analysis points to a turnout of around 1%, somewhat higher than market expectations of 0.8%. While they are rather crude preliminary indicators of the official figures, a nasty April Fool’s day joke from the Istanbul Chamber of Commerce indices would increase the likelihood of a higher-than-expected turnout on Friday. In any case, a 1% reading would leave yearly inflation roughly unchanged, whereas the I index, the Central Bank’s favorite measure of core inflation, could continue with its crawl downwards. But this month’s figure will not change my somewhat unconventional conviction that the Bank (as well as most analysts) is taking many inflationary risks for granted. In fact, I would not be surprised if inflation edges up to the upper portion of the Bank’s forecast range of 5.4-7.2% after hitting 6% by the end of the summer.

At the end of the day, however, even a higher-than-expected March inflation is unlikely to move markets or change anyone’s outlook. The burden of providing the weekly shocker will instead fall on growth and to a lesser extent the trade balance, both of which will be released on Tuesday. With growth, it is not a question of whether the economy has contracted in the last quarter of 2008, the issue is by how much. Here, I again find the market expectation of 5.8% (year on year) a tad bit of too optimistic and would not be surprised if the yearly contraction approach double-digit territory.

Another surprise could come from the trade balance, but here the problem is one of measurement. The well-known link between oil prices and Turkey’s net energy imports has recently broken, making a good forecast of the trade balance rather difficult. In any case, at this point, I would pay more attention to the Turkish Exporters Association’s monthly export figures for March rather than the official statistics for February. I am keeping my fingers crossed that we will not fall to yet another April Fool’s day joke there.

But even a real blow from growth will pale in comparison to a shock bomb from the international front. Here, while the international agenda is quite busy, with such heavyweight items as the European Central Bank rate decision, purchasing manager indices on both sides of the Atlantic, and last but not the least, US non-farm payrolls, the real bliss or heartbreak could be the G-20 summit on April 2. I have written a comprehensive analysis of what the G-20 should and will do for this paper, which will appear tomorrow. But to give out a few spoilers, a global fiscal response to the crisis without too many strict guidelines, at least doubling of the IMF’s resources and concrete steps towards preventing protectionism would make me more than happy. While we are likely to get these measures, though some in word rather than in deed, the G-20 agenda is in danger of being diluted with a pointless grocery list. In any case, though the mood could definitely change until Thursday, the markets are not hoping for too much from the meeting at the moment. This is in fact good news, as it means that a positive reaction is more likely than a negative one.

But market-reaction or not, Thursday’s gathering could be the last chance to avert disaster. If the summit does not lead to concrete steps, we could soon find out that the recent signs of recovery were just part of a false spring, a couple of days of sunshine in a long and dark winter.

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