What we expected, what we got

Turkey’s GDP growth was released yesterday. Expectations were within a wide bandwidth of 4.5% to 6.5%. I personally declared, even in written form, to certain authorities that GDP growth would hit 4% at the lowest or we would see a result of 5.5%, the highest rate we could expect. Thus, confirming my previous estimates, Turkey’s GDP turned out to be 5.2%. How did I make this prediction? Let me walk you through it.

It looked like Capacity Utilization Rates maintained a trend of above 75% in April, May and June. Although the Industrial Production Index during the same period has increased compared to the previous year, a certain decline in its growth rate has not gone unnoticed since its performance has mostly failed to meet expectations.

Survey of Expectations relating to the Manufacturing Industry, on the other hand, had constantly declined during the same period. Keeping in mind that USD/TRY has been rapidly climbing since May, I knew I should find it normal that growth expectations have already deteriorated. However, as there has not been a drastic deterioration neither in domestic nor foreign demand, I came into conclusion that Turkish manufacturing industry was pushing its capacity limits to carry out its operations. To be honest, circumstances have not changed a bit yet.

So, it did not take a fortune teller to say that April-May-June GDP growth rates would turn out to be lower than expected when compared to the first quarter of the year. One has to be blind not to see that construction industry’s contribution to the growth will significantly diminish

“If Turkey’s growth rate, which is expected to be released today, turns out to be lower than 4% it would be a great frustration, if however it turns out to be higher than 5.50% it would then be a great surprise!” I kept repeating that to everyone until the GDP data was released. And once it was released, I had the chance to see the current state of contributing industries and to make future growth projections.

“What will happen next?”

I should tell you that I expect growth rate in the upcoming quarters will continue to decrease when I consider the obvious fall in imports, 85% of which consists of raw materials, intermediate goods and investment goods.

In short, it looks like Turkey’s year-end growth rate will turn out to be between 2.5% and 4.5%. In case of a negative scenario, which is the 2.5%, we should expect an economic environment where exchange rates and interest rates will continue to climb higher while internal-external negative impacts will keep growing. A GDP growth by 4.5%, on the other hand, would only become real if we can manage to make our ship stay afloat in the storm.

In the meantime, keeping the Current Account Deficit and Budget Deficit under control will be Ankara’s key duty as growth keeps slowing down. To achieve this target, the Government will need to provide tremendous support to exports and take urgent disciplinary measures to reduce public expenditure.

Our past experiences tell us that the problems will not go away with simple rate hike moves of the Central Bank. If the CBRT is to hike rates in September 13, it should also implement additional measures to enhance the impact of such increase. To transform Turkey, urgent reforms are required in many areas including taxation, education, justice, government spending, foreign trade and banking.