Monday, April 27, 2009

Weekly Hurriyet Column: Green shoots a la turca

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive.

One problem I have with these columns is that since I only write a week, I try to squeeze in a lot of stuff at the end of the day. Therefore, some additional points are in order:
  • This morning, I've reading that Summers is now saying no recovery should be expected before six months. Really a swing of mood...
  • I started talking about the European PMIs with "oddly enough" because some of the largest IMF downward revisions are in Europe, and the consensus view is that Europe will be/has been hit by the global crisis more than the US, partly because the policy response in continental Europe is generally seen as insufficient.
  • With regards to Turkey and the IMF, I am getting more confused everyday. First, DSK says he expects a deal soon. Then, Simsek says the deal may be delayed. And now I just read Simsek saying the deal will be soon. And then I read Erdal Saglam, who is more or less, the closest thing to a gossip econ writer and I get even more confused, as his sources tell him of significant discord between the Fund and the government. And these are developments of the last few days:):):)
  • The sharp jump in real sector confidence definitely deserves more discussion than the few sentences I devoted. Looking at the components of the index reveals that the largest increases are in three-month expectations. While the tax decreases have definitely factored in, I feel there is also some sunk-cost selling going on here.

Spring has arrived, and along with it “green shoots”. I am not talking about horticulture, but the new buzzword for signs of recovery from the crisis. While I have my own green shoots as well, I think it is way too early to start rejoicing.

Take Fed Chairman Bernanke’s remarks on signs of stability in the housing market. Rising house prices for the last two months (a first since 2006) might not be reflecting much more than the temporary slowdown in foreclosures, as banks are waiting the details of the government’s take on the problem. Similarly, while the sense of freefall could end soon, as Obama economic advisor Summers has recently notes, the decline itself shows no signs of stopping; it is only its rate that is decelerating. Inventory depletion and deleveraging, my other two conditions for revival (the first being housing stability), still look far away.

However, markets were not acting on such fineprint last week. Rather, fears of nationalization and worries about the bank stress tests to be disclosed next week were exacerbated by IMF’s new estimate of financial losses at USD 4100 billion. In fact, the Fund was the nasty party crasher, as it also released significant downward revisions to its growth forecasts.

While the world has been preoccupied with the Fund’s growth downgrades in its World Economic Outlook (WEO) report, I saw my own green shoots in its analysis of when the recovery would start. This section of the WEO suggests that the worst of the global recession may be behind us, while at the same time hinting that the recovery will be slow and painful.

I could see even more green shoots in the least likely of places, the latest European purchasing managers’ indices. While the largest monthly rise in the index’s history provided much-needed relief after the gloomy Fund forecasts, I would not make too much out of this noisy headline number. However, a closer look reveals widespread inventory depletion in manufacturing, the sort I have been looking for in the US. Oddly enough, Europe may be about to start the ascent to recovery as well.

Despite below-average temperatures, Turkey is living its version of green shoots. Notwithstanding inconsistencies in the government’s fiscal figures and the apparent differences between the Fund and the government on the economic outlook, markets have embraced a large spending-spree IMF program, although I have started to hear a single mumble of discontent here and there. Expect the mumbles to morph into widespread grumbles if there is no improvement in two to three weeks.

Similarly, the recent uptick in confidence is providing a false sense of recovery. For one thing, both consumer and real sector indices are moving up from extremely low levels, so the most we could hope for is the beginning of a slow recovery. Such indices tend also to be affected by the exchange rate and the stock market, both of which have been supportive of late. The government’s temporary tax decreases have factored in as well. Unfortunately, none of these reflects a change in fundamentals, and unlike European data, I find almost no positive details in the Turkish numbers.

I see a parallel sense of desperation on the consumer credit front. The recent upward trend in consumer loans and credit cards could as well be reflecting a last-resort move from cash-strained consumers. If I am right, it will not be long before the hike in non-performing loans in commercial credit spreads to the consumer segment.

There may be an element of weather in my wary outlook, but I am not seeing frost all over: Just only where others see green shoots. Similarly, I notice sprouting where others see rime. I am looking real hard, but I do not detect a single bud in Turkey.

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