Monday, July 5, 2010

Weekly Hurriyet Column: The sum of all fears

Below is the unedited version of my column for this week. You can read the final version at the Daily News website, but since I have been editing my columns myself on the Daily News website since March, you won't see much of a difference between the two. The title is, after several weeks, another cheesy movie reference- it was about time:)

As for the column, it's great to look like an idiot when the very same day you claim that inflation will get stuck, you get a significantly lower-than-expected figure. But joking aside, inflation doves should think twice before rejoicing because as I argued before, food prices are very volatile- BTW, if you are interested, there is an interesting paper on the determinants of food price volatility, although it is not about Turkey. Moreover, it is not a big deal to get inflation to the 6.5-7% range in Turkey; the problem is to pull it below that level in a sustained manner. That's what I wanted to say (but then ran out of space at my column).

Anyway, I will be elaborating further about some of the points I raise in the column in a response to a reader email later today or tomorrow at the latest- I have already reneged on my promise of a response over the weekend, so that is at the top of my agenda. Anyway, on to the column:

It is hard to argue with numbers, especially when the number in question is a growth rate that is the highest in Europe and second highest in the OECD. But that is exactly what I am going to do.

What comes down must go up…

Although Sir Isaac Newton had an apple in mind with this phrase’s converse, that’s exactly what has happened with the first quarter growth figures, which were released last Wednesday. The economy did expand 11.7 percent year-on-year in the first quarter, but that number does not look all that impressive when you remember the record contraction of 14.5 percent in the same quarter of 2009. And while GDP registered its first yearly (rolling-sum) positive growth since the crisis, it is still well below pre-crisis levels. In fact, working-day and seasonality-adjusted quarterly growth, at 0.15 percent, is rather anemic.

The breakdown of growth points toward a typical Turkish recovery, with the largest contribution coming from private consumption. But private investment and inventory build-up have been supportive as well. The former looks especially impressive on your friendly neighborhood economist’s own adjusted quarterly calculations. On the other hand, stocks have bounced back impressively, hinting that they may not have much more room to go. The same breakdown shows that net exports are to blame for the feeble quarterly growth, suggesting that the effect of the lira strength may have been stronger than I originally envisaged.

…But how fast?

The trillion-dollar question of the Turkish economy is, however, the pace of recovery for the remainder of the year, and early leading indicators do not look promising. For example, the Central Bank’s, or CBT’s, Business Tendency Survey, or BTS, the earliest of those indicators, showed, two weeks ago, that the drop in capacity utilization and real sector confidence index that had started in May grew stronger in June.

Last week’s releases unfortunately did not contradict the BTS, with the fall in consumer confidence becoming more prevalent in June, as the CNBC-e index registered a 5.5 percent decrease. A similar plunge was seen in the Purchasing Managers Index, or PMI, as Turkey barely lost the bronze medal to Australia in the race for the most decrease in June PMIs.

On the bright side, the details of these indices show that most of the falls are coming from a worsening of expectations rather than the present state, as worries of a global slowdown and euro area woes seem to have spilled over to Turkey. But even the current conditions parts of these indices, as well as the unemployment rates implied from the monthly KONDA surveys I’ve been working on as a consultant, have been softening of late. In that sense, it will be interesting to see if the weak May capacity utilization figure will be reflected in Thursday’s May industrial production.

It is important to underline that the data are not pointing at a contraction, but merely a slowdown in the pace of recovery - what economists call the second derivative. But nevertheless, they have important implications, and gloomy as they may look, they are keeping some content, if not cheerful: The CBT had placed a slow recovery as one of the pillars of its policy rate strategy, and while they seemed to have been mistaken up until May, they have been vindicated by the recent statistics. In fact, the CBT has started to emphasize the implications of global economic developments for domestic activity, hinting that it is considering delaying rate hikes even further.

But I still think that the CBT would be in a rather tight spot if the economic recovery did indeed lose steam, and inflation got stuck around 6.5-7 percent. That is the sum of all fears for the Bank.

Emre Deliveli is a freelance consultant and columnist for Hurriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at

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