Quarterly annual growth rates were so modest that cumulative nine-month figure was lower in 2013 than in 2012.

In September industrial output increased by 6.4 percent year-on-year. Monthly figures have been quite volatile recently. In August, for instance, output decreased year-on-year by 1.4 percent. We should not take the monthly changes so seriously.

Here is a positive development based on quarterly figures: industrial output growth was in decline since the first quarter of 2012 until the previous one when it increased only slightly. Starting in 2013, however, output growth strengthened: 1.3 percent in Q1, 3.2 percent in Q2, and finally 3.8 percent in Q3. But this “modest” outlook disappears when we look at cumulative figure for the first nine months. Year-on-year output growth rates in the first nine months were 11 percent in 2011, 3.1 percent in 2012 and 2.8 percent in 2013. There is nothing confusing here: in 2013, each quarter surpassed the preceding one in output growth. However, quarterly annual growth rates were so modest that cumulative nine-month figure was lower in 2013 than in 2012.

This implies that GDP growth will be weak in 2013 unless supported by public spending. The support from the public sector was quite strong in the first half of the year. In the first seven months, GDP grew year-on-year by 3.7 percent, mainly thanks to the strong increase in public investment and consumption. Given the current election climate, this should be expected to continue in the second half of the year and possibly in 2014.

I still believe that GDP growth will not be much different in 2014 than in 2013. Please recall that the official estimate for 2013 GDP growth after the latest revision is 3.6 percent. This is mainly because net capital inflows in 2014 will most probably be weaker than what it was in 2012 or in the first four months of 2013. There are two critical outcomes of the drop in net capital inflows. First, it pushes exchange and interest rates up. Although the increase in the exchange rate promotes exports, it at the same time disturbs balance sheets of companies which have higher FX liabilities than earnings. Borrowing FX becomes more difficult for everyone, forcing them to reduce their size depending on the severity of constraints to FX borrowing. This means lower employment and hence lower consumption. The challenges facing the corporate sector might have repercussions for the entire economy. This situation is aggravated by the interest rate hike. Second, lower net foreign capital inflows means lower domestic credit supply growth. Since banks cannot borrow from abroad as easily as they used to, they cut the amount of loans they extend. Large firms also face difficulty in borrowing from abroad. Credit demand growth decreases simultaneously.

There is another factor that also will constrain growth. The Banking Regulation and Supervision Agency has introduced steps which will reduce credit growth rate and will affect GDP growth negatively. I don’t argue that this decision was a mistake. My point is that the Agency’s decision will also cause the credit growth rate to decrease. Under these circumstances, export performance and public spending will be the main determinants of GDP growth in 2014. Of course the story changes completely if two central banks give us a surprise. If the European Central Bank launches quantitative easing or the Federal Reserve postpones tightening, we have to start over. But neither of them seems likely for now.

This commentary was published in Radikal daily on 09.11.2013