Monday, September 13, 2010

Weekly Hurriyet Column: Use your illusion of growth

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 just me paying homage to one of the best hard-rock albums of all time. Mind you, this is volume I; for a homage to volume II, you'll have to wait for next week's column.

As for the column, you probably know by now, especially since I am posting it here a few days late, that my projection of 8.5 to 9 percent turned out to be a tad too pessimistic, with second quarter GDP growth coming at 10.3 percent. Here's where that growth came from, compliments of, as usual, Turkey Data Monitor:
The difference between my forecast and the actual outtturn is mainly due to private investment. In addition, both consumption and stock build-up turned out to be somewhat higher than what I was expecting.

But to render unto Caesar what is Caesar's, I did mention at the column that "a strong stock build-up, along with a robust consumption outturn, could easily take us just shy of double-digit territory". While both turned out to be the case, I honestly did not expect such a strong private investment reading, as I would not expect the private sector to undertake so much capex when capacity utilization is so low. In a similar vein, I am not sure why stock build-up did not turn out to be even stronger if companies are so confident of the future...

There is another enigma at the production side: While home sales have plummeted in the first half, construction activity is buoyant. Such a strong construction turnout in the second quarter was not in the permit and license data, which came in earlier than the GDP print, making all  this even more intriguing. But more interestingly, it naturally takes time for permits to turn into apartment complexes and houses, so we should see more of the same pattern in the second half of the year. Then, the natural question is: What would happen to the real estate market once these licenses and permits start to turn into residences and office spaces? Dunya columnist Alattin Aktas recently took on this issue at his column at Dunya- have a look there if you can read Turkish.

These are just a couple of footnotes of your friendly neighborhood economists and are in no way meant to be a full-fledged take of the data. For that, see any of the analyst reports out there or have a look at RGE's take, which summarizes several reports.

Anyway, on to the column:

Now that the referendum is over, it is time turn our focus back to the economy, and tomorrow’s second quarter gross domestic product, or GDP, release offers plenty of opportunity for that. I am aware that offering my growth forecast a day before is not very valuable, but my bottom-up approach could at least provide some educational value.

Argentinean economist Guillermo Calvo once said that we don’t know much about economics other than accounting identities. The accounting identity I will utilize is the national income accounts, or NIA, one: GDP is equal to domestic plus foreign demand. Domestic demand is, in turn, made up of consumption, investment and government spending. I will go over each to come up with an aggregate figure.
Consumption seems to have been surprisingly strong. Leading indicators such as consumption goods imports volume, domestic consumption taxes and CNBC-e consumption index are all hinting that consumption growth might have accelerated on a year-on-year, or YoY, basis. While none of these is a perfect gauge of consumption in the NIA by itself, credit demand and consumer confidence look stronger in the second quarter than the first quarter as well.

As for investment, machinery and equipment production usually does a pretty good job in predicting the direction of investment, and it is showing growth at a comparable pace as the first quarter. Similar signs are coming from capital and intermediate goods imports, capacity utilization and real sector confidence. All in all, it seems that private domestic demand was the deciding factor of growth in the second quarter.

The weak links will probably be the government and external demand sides. As there was some fiscal adjustment going on in the second quarter, the contribution of government expenditure to growth could even be negative. The same could be said of foreign demand, as is the case in Turkish growth episodes. But since export volumes were able to keep up with import volumes, the negative print there is likely to be moderate.

When I add all these up, I come up with a YoY growth of 8.5 to 9 percent. The deciding factor will be inventories, which are difficult to predict, and a strong stock build-up, along with a robust consumption outturn, could easily take us just shy of double-digit territory. At first sight, it seems that Turkey is doing well, but that would be highly illusionary.

For one thing, the second quarter growth figures are still reflecting base effects. A case-in-point is last week’s July industrial production, where the stronger-than-expected outturn resulted in premature jubilation in the media, although the monthly increase was a mere 0.3 percent after adjusting for seasonality and working days.

In fact, leading indicators such as purchasing managers as well as Central Bank’s real sector confidence and composite leading indicator indices are pointing to a considerable slowdown in the pace of recovery in the second half. While no one has voiced it yet, it is even possible for the output gap to widen again.

The Central Bank has outlined how it would respond to such a scenario in its latest Inflation Report. According to the Bank, an outcome whereby global economic problems intensify and contribute to a contraction of domestic economic activity may trigger a new easing cycle.

However, I think we are still far away from that scenario, not that I am optimistic on the global or domestic outlook, but because, as I have argued before, I believe there is not as much slack in employment as commonly assumed.

But I have been scratching my head since July, trying to figure out how the Bank would respond if the economic recovery lost steam, and inflation got stuck around 6 percent.

*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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