This week important indicators were announced. The most surprising one was October industrial production ratio. Rise in industrial production was inconsistent with the October capacity utilization ratio announced a month ago. Whereas industrial capacity utilization rate in October fell by 4.9 points compared to the same period last year, industrial production is announced to have increased by 6.5 percent also compared to the same period last year.

Therefore, those arguing that in October industrial production will fall slightly or rise insignificantly in October based on the capacity utilization ratio announced earlier turned out to be wrong. For instance, on November 12, I wrote that we should not be surprised if a fall in industrial production comes in October. But it turns out I am the one to get surprised. As the data announced this week suggests, industrial sector capacity utilization rate for November fell by 2.2 points compared to same period last year. Yes, capacity utilization rate dropped again.  In that case, what can we expect about industrial production? Where does this disparity between capacity utilization rate and industrial sector growth result from?

I was having a chat with a colleague who was once dealt with these indicators heavily. He put emphasis on the method we use to calculate capacity utilization ratio: Capacity utilization rates derived from annual data declared by individual firms are weighted. Naturally, the weight of a small firm in the index cannot be the same with that of a large holding.  If you take a short tour at TURKSTAT's website, you see that production levels for the year before are used to weight firms.  I believe in such periods the inconsistency between data stems from this phenomenon. I will try to "dig in" this issue tomorrow.

GNP growth figures for the first three quarters of the year were no surprise. Then, data for the first two quarters were corrected leading to a slight rise in the rate of contraction. This was also no surprise. If no backwards correction is made, for which there is no reason to take place, rate of contraction for 2009 will be around 6 percent.

I stated my 2010 growth forecast before: economy was expected to grow between 3.8 and 4.9 percent under the basis scenario. The economy will most probably grow not only in 2010; positive growth rate is expected also for the last quarter of 2009. This process of growth will be based on three factors. First two is economic: exports will rise in line with the income rise in Turkey's export markets and the increase in credit volume, as banking sector encountered as of the second half of this year, will also continue in 2010. The last factor is mathematical: As level of GNP was low in 2009, a slight amelioration will lead to positive growth.

The second economic factor that will contribute to 2010 growth bears higher risks for a couple of reasons: First, the volume of non-performing loans in banks' balance sheets increases despite the regulation in 2009 loosening the non-performing loan criteria. Under the previous method, volume of non-performing loans would have been higher. This might reduce risk appetite of banks to a certain extent. But on the other hand, fund the Treasury transferred to the Credit Guarantee Fund finally become operable. The credit volume to be created through this fund might eliminate such a reduction in risk appetite.

Under these circumstances, the level of 2010 budget deficit and how this deficit will be financed become important. If the Treasury has to sell banks bills above the planned quantity depending on the possible negative aspects of the program declared this week by the Treasury, volume of credits banks extend to corporate sector and consumers might drop. Considering that two elections will be held in 2011 and 2012, respectively, the pivotal importance of furthering the credibility of Medium Term Program becomes more prominent.

This commentary was published in Radikal daily on 13.12.2009