Home Consumer debt Turkey’s “economy captain” can no longer redirect the ship

Turkey’s “economy captain” can no longer redirect the ship


As the cycle of economic crises in Turkey began to undermine the ruling alliance, organized crime boss Sedat Peker launched a series of accusations over dirty relations within the state over the past month.

Such serious allegations by a fugitive mafia boss should be the subject of a formal parliamentary investigation. However, it appears the government is trying to ignore them as it seeks to control a power struggle within the alliance.

As the day-to-day running of the economy results in sharp swings in Turkish asset prices and a cycle of economic hardship, Peker’s videos, watched by millions of people in real time, will resonate with the electorate amid the economic turmoil. continues to unfold.

Thus, it is appropriate to focus again on the realities of the economy, in particular on the GDP data for the first quarter and the leading indicators of growth in the second quarter of the year.

It was hardly a surprise when the government reported economic growth in the first quarter of 7 percent last week. In 2020, negative real interest rates, the stimulus of loans and monetary subsidies, as well as the alleged spending of $ 128 billion of the central bank’s foreign exchange reserves, boosted domestic demand to such an extent that the The overheating economy will now take time to calm down.

During lockdowns imposed during the COVID-19 pandemic, Turkey’s manufacturing sector was able to remain open and continue to increase production and inventories. While the service sector was hit the hardest, industry fueled domestic demand, which focused on raw material purchases. Then, with the discovery and distribution of the vaccine and the reopening of the American and European economies, Turkish manufacturers began to benefit from better external demand. During the pandemic period in the United States and the euro area, direct subsidies to citizens’ incomes helped increase savings. This growth in assets turned into consumer demand after the introduction of vaccines and the reopening of economies.

The above are the main drivers of economic growth that Turkey achieved in the first quarter. This phenomenon is reflected in the share of capital in GDP rising from 41% to 46% over the past three years.

But for households, the situation is not so bright. The government, which did not choose to create a larger budget deficit through direct income support, chose to stimulate the economy by encouraging household spending with cheap loans from public banks. The result of this choice was a surge in inflation rather than a budget deficit, a larger current account deficit and a sharply depreciating pound. Some locals used the cheap loans to buy hard currency, while others mainly turned to buying goods.

The interest rate hikes in November and December, implemented during the four-month tenure of central bank governor Naci Ağbal, reversed the decline in the value of the lira and boosted consumer confidence. This prompted households to keep spending. As the government, or the “captain of the economy,” created debts, labor’s share of GDP fell to 35%, from 38% three years ago.

In short, while the demand for Turkish products abroad will continue to contribute to Turkey’s economic growth in the coming months, domestic demand is expected to weaken.

The question now, of course, is in which direction the growth will go. Şahap Kavcıoğlu, the new central bank governor that President Recep Tayyip Erdoğan appointed in March to cut interest rates, is looking for an opportunity to fulfill his mandate. The question is, by how much more will the lira depreciate? Lack of confidence in government policies among foreign investors means that the economy is deprived of capital inflows. Meanwhile, inflation is rising sharply in almost every country along the US-EU-China axis, matching Turkey’s “booming” growth cycle.

Turkey’s Purchasing Managers Index (PMI) is now sounding the alarm bells for industry and the economy in general. PMI title fall to 49.3 in May from 50.4 in April, falling below 50 for the first time in a year. Pandemic lockdowns aren’t the only ones to blame for the weakness. Any reading below 50 means a contraction in the manufacturing sector. The pace of job growth was at its lowest in the past 12 months, according to the survey. New orders from abroad slowed down. Producers are reporting supply issues and increased costs and say they will reflect those costs in selling prices. The devaluation of the lira – it hit an all-time high last week – serves as a catalyst for this process. Another important factor is that producers are pointing out that orders from abroad, which have steadily increased over the past four months, are starting to slow down.

A consumer confidence index for the month of May published by BloombergHT television last week indicated a decline in consumer demand. The index hit an 11-year low last month, falling 3.75% to 55.2. The survey also showed that consumers are spending today because they can expect more inflation and more currency depreciation tomorrow. Consumer demand is not expected to continue at the same pace until the end of the year under current economic conditions.

While last year’s base effect will also increase annual economic growth in the second quarter, the slowdown in quarter-over-quarter growth seems inevitable. Turkey is sure to post economic growth of 5.5-6% this year, but the reasons will be mathematical rather than a reflection of a solid and measurable improvement. Quarterly growth data is on course to end the year flat or negative, starting with the 1.7% posted for the first quarter. This means that economic growth next year could be around 3%.

The financial costs of the government’s choices in the face of the pandemic mean that the economic growth of 7% in the first quarter and the expected growth of 6.5% in a full year will not be felt by ordinary people. By 2022, the “captain of the economy” will realize that it has become impossible to steer the ship towards inclusive growth.

Monetary policy, which is controlled by the government, has failed to stem double-digit inflation, and fiscal policies have failed to provide income to citizens when they need it most. Then the government will ask millions of people facing severe economic hardship to vote in the elections, currently scheduled for 2023. And the simple fact is that these same people’s senses have been sharpened by Sedat’s accusations. Peker, who says top officials have gotten richer and richer at the expense of the average man.