Monday, August 17, 2009

Weekly Hurriyet Column: O consumer, where art thou?

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. First, I have to apologize for yet one more cheesy movie reference, but I just cannot help it. This way, at least you are learning something about my cinema taste as well:)

Coming to more serious matters, one important difference between the Turkish consumer her American counterpart is in the latter's indebtedness, which has important implications for the savings behavior in both countries. But that will have to wait for some time, as I have topics lined for the next three weeks- unemployment, Industrial Enterprises, Central Bank pacification, and The Devil's headscarf (you'll just have to wait for that, no spoilers this time around). At creative spells such as this one, I just wish I was writing at the Daily News not weekly, but well, daily, as the paper's name suggests:)....

Having just returned from two weeks of minimal contact with the outside world, I am relieved to see that the economic landscape has not changed much.

Despite the increasing amount of positive signals, the global economy continues to muddle through a slow recovery path, and regardless of some ups and downs, markets are more or less where I left them. On the domestic front, slow recovery continues to be the name of the game as well notwithstanding the false positive mood created by June industrial production. As for markets, Turkish assets have managed to sustain their momentum, with the lira stable and the benchmark rate hitting single digit territory yet again.

The thorny bush in this idyllic landscape is consumption. The representative consumer, who was showing signs of revival before I left, has vanished into thin air in a matter of two weeks with the release of July data on both sides of the Atlantic. In the US, retail sales fell unexpectedly, whereas Turkish consumption indices confirmed the worrying outlook in the previous week’s CNBC-e confidence indices, registering an 11% monthly decline.

There are two important lessons to be taken from these figures. For one thing, both the Turkish and US data have once again reminded everyone that the effect of temporary incentives seems to be, well, temporary (surprise surprise). In the US, the latest retail sales turnout hints that the cash-for-clunkers program not only may have merely brought future car sales forward, but could also be sucking money from other potential purchases, as sales excluding autos fell a resounding 0.6% month-on-month in July. In Turkey, we have been seeing both effects in last month’s consumption indices.

But more importantly, it should have been crystal clear to all by now that a strong recovery will be impossible without getting the consumer on board. The June Turkish industrial production data is a case in point. A rough sectoral analysis along with the consumption indices of the last couple of months reveals that destocking has run its course after tax incentives have sent consumers bargain-hunting for a while. As for the headline figure, while many were deceived by the improvement in the year-on-year number, adjusting for seasonality and working days reveals a slightly more muted monthly rise than May’s 0.8%, supporting my concerns.

In fact, just merely a day had passed when July capacity utilization cooled down the industrial production euphoria. Taken together, capacity utilization, industrial production and the consumption statistics all point to strong domestic demand headwinds, whereas preliminary exports data for July and August from Turkish Exporters Association hint that global demand for Turkish goods is not recovering at all, as they point to an exports performance actually worse than the first half of the year.

It would be possible to sail against such strong domestic and global headwinds with a comprehensive economic program to steer expectations. But I still see no concrete evidence of that. On the contrary, the latest knockoff fiscal measures and the increasingly worrying medium-term financing outlook mean that the government is intent on going sternpost into the no-sail zone. Therefore, these recent data releases place my forecast for the growth contraction in the second quarter barely in single digit territory, which would translate to a marginal quarter-on-quarter increase, somewhat worse than market expectations.

It will eventually be the consumer, in Turkey or in the US, who will decide the shape and speed of the recovery. The optimist in me wishes to think that she has just taken a temporary respite, but the evidence unfortunately hints otherwise.

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