With a focus on the “moment” these all are right steps towards stability. From a dynamic perspective, however, these are proved wrong.

There were two factors that triggered the decrease in growth rate. First, in June 2011, the Banking Supervision and Regulation Agency (BRSA) took effective steps to slowdown the credit growth. The second factor related to the problems across Europe:  with uncertainty about the future of Europe escalating, risk appetite headed down. Banking and corporate sectors faced difficulty in borrowing from abroad. Coupled with the weakening of risk appetite, domestic credit demand decreased. In addition, sluggish growth in Europe affected Turkey’s export performance negatively. Please note that only the first factor is connected to the “gearing down” in fashionable jargon, while the others are external. The Central Bank’s decision to increase interest rates substantially by the end of 2011 reinforced the gearing down efforts by the BRSA.

Weak growth

It is evident that the negative repercussions of the mentioned factors are ongoing. New figures validate that growth rate in the third quarter will not be much different than that in the second quarter. Thus, third quarter’s growth figures will not be pleasing. Yesterday, foreign trade statistics for August were announced. Here is what we have:

Due to high levels of gold bar exports lately and the fact that Turkey exports imported gold, it is necessary to exclude gold trade when making assessments on growth performance. Since December 2011, non-energy and non-gold imports has been decreasing around the same rate year-on-year. The rate of decrease was 6.7 percent in July and 8.5 percent in August. Drops in non-energy and non-gold imports are generally observed in periods of low or negative growth. Therefore, these figures give bad news about growth performance.

Export performance

Exports are no different, either. Again for the purposes of growth assessment, I will exclude gold exports. Since 2009, exports decreased annually only in April, July and August 2012. The rates of decrease were 6.6 percent in July and 3.8 percent in August. These include changes in the euro-dollar exchange rates. However, the outlook doesn’t change when fluctuations in exchange rate are adjusted, either: Turkey’s export performance has been deteriorating.

The fiscal policy is tightened and thus domestic demand is repressed in a period where fiscal policy was most needed to boost growth. With a static approach, that is, with a focus on the “moment” these all are right steps towards stability. From a dynamic perspective, however, these can be proved wrong: when the economy was growing rapidly (as if the breaks have failed) the public sector could have saved more and used the savings to cushion the economy today in the face of slow growth. And, in cumulative, fiscal discipline could have been secured. The fiscal rule, which was once debated widely and raised in government agenda but abandoned later, served this exact function, right?

This commentary was published in Radikal daily on 29.09.2012