High Export Sales Offset Declining Consumer Demand in Turkey

on Sep 14, 2012
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In the second quarter of this year, Turkey’s economy decelerated to its slowest pace since 2009 with growth of just 2.9 percent, reinforcing expectations of a rate cut from the central bank. The lower than forecasted growth suggests the government will probably not meet its 4 percent target for the year and might have to loosen up its fiscal policy.

“With first-half growth at 3.1% and signs of slowdown in the second half mounting, we remain comfortable in our full-year growth forecast at 2.9%,” opined Inan Demir, chief economist with Finansbank.
Domestic private consumption in the second quarter plummeted to minus 0.5 percent from first quarter growth of 0.2 percent. The decline in consumption is most visibly reflected in the performance of the retail industry in the form of shopping malls – one of the great symbols of the country’s boom years. Cuneyt Yavuz, general manager of Mavi Jeans, predicts that with the current levels of consumption, shopping malls will be closing at the rate of one per month.

!m[](/uploads/story/362/thumbs/pic1_inline.png)Net exports contributed 5.7 percent to the GDP growth and rose at an annual rate of 20 percent in the second quarter. With declining imports to 3.6 percent the current account deficit for Turkey experienced a sizeable reduction. The deficit went down from the record high $78.6 billion (£49.06 billion) in October, to $63.5 billion (£39.63 billion) in June or around 8 percent of GDP. But according to William Jackson at Capital Economics in London, 60 percent of the increase in exports for the first seven months was due to soaring gold sales to Iran, where people have turned away from sanctions-hit banks and have directed their savings to the precious metal. After selling so much of its stock to the Middle East, it won’t be a surprise if Turkey looses a great deal of its exports and turns into a net importer. “We don’t think the export boom can continue at its current pace – not least due to falling demand from the Eurozone,” Mr Jackson says.

With the impressive reduction in the current account deficit and the 2.2 percent decrease in inflation down to 8.9 percent in August, it is very likely for central bank governor Erdem Basci to shift his focus to boosting economic growth. According to economists, Turkey’s rate setters may cut the ceiling of the so-called interest-rate corridor, which ranges from the overnight lending rate of 11.5 percent to the benchmark one-week repo rate of 5.75 percent, by as much as one percentage point.

Nilufer Sezgin, chief economist with Ekspres Invest, opined: “Turkey’s central bank seems more concerned about growth and is ready to provide some further support via narrowing the interest-rate corridor….The central bank is closer to a global monetary easing scenario, which has the potential to deepen the monetary easing at home even further.”
In both 2010 and 2011, Turkey expanded by more than 8 percent annually and became the world’s third-fastest-growing economy, closely following China and Argentina. In June this year, Moody’s upgraded Turkey’s credit-worthiness to one step below investment grade matching the country’s grade with that of Fitch Ratings. The credit rating agencies signalled that any further upward movements will depend on sustainable growth, which does not fare well with how Turkey has performed in the second quarter.

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