Turkish Economy Moves out of Freefall: Recovery Requires More Time

The Turkish Statistical Institute (TurkStat) released its June figures on the industrial production index, which gave mixed signals concerning the influence of the economic crisis on the Turkish economy (www.turkstat.gov.tr, Press Release, August 10). The figures show that although industrial output is still down from last year’s levels, industrial production is moving upward. The Turkish economy is no longer in the free fall, but a permanent economic recovery might not materialize soon.

Industrial production dropped by 9.7 percent in June 2009 on a year-on-year basis, maintaining a continuous decline since the second half of 2008. After industrial production contracted by a record 23.8 percent in February, the decline in industrial output started to slow down in March, and this process has continued (EDM, June 11). As a sign of this partial recovery, in June the contraction rate dropped to single digits for the first time since November 2008. Moreover, in June industrial output increased by 7.3 percent compared to May (www.turkstat.gov.tr, August 10). This trend follows on the previous month. In May, TurkStat announced that industrial output increased by 0.8 percent compared to April (www.cnnturk.com, July 31).

According to the main industrial groupings (MIG’s) classification, the highest decline in June compared with the previous year was in capital goods -by 29.7 percent. Production declined by 10.6 percent in manufacturing industry, 7.9 percent in mining, and 7 percent in energy.

Economists suggest that the slowing of the decline over four consecutive months and the rise in output on a month-on-month basis has bolstered expectations that the contraction might be bottoming out. Tanil Kucuk, the Chairman of the Istanbul Chamber of Industry (ISO), said that although 9.7 percent is a very high rate of decline under normal conditions, "looking at the economic situation for the past year, we consider this development the lesser of two evils and find it promising" (Hurriyet Daily News, August 10).

Experts believe that there is a visible upturn in the Turkish economy. Recently released economic figures also lend partial support to this optimistic outlook. Data released by the Central Bank showed that the current account deficit dropped 65 percent in June on a year-on-year basis. In the first half of 2009, the current account deficit was also down 75.7 percent compared to the same period last year (www.ntvmsnbc.com, August 10). According to the projections of TurkStat based on the figures from the first half of 2008, Turkey’s foreign trade deficit is likely to decrease by the end of the year and will drop to $27.2 billion (Referans, August 11). At the end of 2008, Turkey’s foreign trade balance recorded a $69.8 billion deficit (Milliyet, January 30). The exponentially growing foreign account deficit and foreign trade deficit were major concerns for the Turkish economy prior to the global financial crisis. The slowdown brought about by the crisis had a positive effect by curbing Turkey’s imports. Although exports also declined, as a result of the shrinking global economy, the Central Bank estimates that Turkey’s export volume will grow as the global economy starts to recover.

The improvement is attributed largely to the economic recovery plans which the government launched in the first half of the year. Through several stimulus packages, the government introduced temporary tax cuts on automobiles, home appliances and housing in order to generate domestic demand and reduce the impact of the crisis on the country (EDM, March 16). The effect of the economic packages in this recovery is evident, especially in household appliances production, where there is a clear increase. The production of durable consumer goods increased by 7.2 percent and perishable consumer goods increased by 1.8 percent. However, the production decline within the automotive sector has continued (www.turkstat.gov.tr, August 10).

Nonetheless, experts estimate that the effect of the domestic demand generated by the stimulus packages might wane after August. Therefore, they expect the contraction in the economy to persist in the third quarter of 2009, and perhaps beyond (www.ntvmsnbc.com, August 10). Therefore, though finding the recent figures promising, the representatives of industrialists had expected more than "hope" and called on the government to take additional precautions to get the country out of recession (Anadolu Ajansi, August 10).

However, given the heavy costs of the previous packages on the treasury, the government is unlikely to pass a large-scale stimulus package. Due to the public spending ahead of the March local elections and the declining state revenues as a result of the crisis, the budget deficit has already surpassed the estimates at the beginning of the year. While the deficit is expected to reach TL 70 billion at the end of the year, the government is trying to keep it within the range of TL 60 billion. Toward this end, it has already raised some taxes and announced cuts in spending, including healthcare. Therefore, rather than introducing new packages to stimulate demand, the government is working on new measures to narrow the budget deficit (Radikal, July 23). Although tax hikes and limitations on government spending might narrow the gap, they may also curb demand and negatively affect growth.

The Turkish economy may no longer be in free fall, but it is unclear how sustainable the recovery might prove. Since the effect of the domestic stimulus packages appears to be short-lived and the government is unlikely to initiate any new stimulus packages, the Turkish economy’s sustainable recovery depends on external demand, and hence developments within the global economy.

Fortunately, the upward trend in the Turkish economy is accompanied by the recent news coming from the world markets. American, Chinese and other large economies also reported the positive effect of economic packages in preventing the deepening of the global recession. While signs of recovery have raised hopes that the global economic downturn might be coming to an end, it is too early to expect an expanding external demand to stimulate the Turkish economy. Therefore, it might take more time before Turkey can move out of the recession.