Export-driven growth

After the turbulence on the financial markets in May and June there was a marked slowdown in domestic demand. At the time we forecast that the slowdown in domestic demand would result in a slowdown in the economy as whole. In fact, the data for national income for the third quarter of the year which were published last December confirm our forecast. Because those data show that the growth rate, which had been over 7 percent in the first half of the year, fell to 3.4 percent in the third quarter. But the data published last month by the Turkish Statistical Institute for the final quarter of the year and the year as a whole paint a different picture. The previously published figures were revised and, according to the latest figures, even though there was a slowdown in growth in the second half of the year the figure for the year as a while still came in at 5 percent.

Even though the rise in private consumer spending came to a complete halt in the last quarter of the year and the increase in investments slowed considerably, if we look carefully we can see that the reason for such an increase in value was the growth in exports of goods and services. A very large proportion of the growth rate of 5.2 percent in the final quarter of 2006 was the result of an increase in exports of goods and services. A modest increase in investments also made a contribution. The contribution from increases in private and state consumption was almost zero.

The Power Of Exports
In fact, we had noticed that exports began to rise again in the second half of the year. But because we believed that exports were not yet strong enough to carry the economy on their own, we did not think that this could be sufficient to ensure continued rapid growth. We thought that in a situation where domestic demand was static the rise in exports would only produce economic growth of 2-3 percent. But we were mistaken.

The reason for us being mistaken was that, as the result of the incredible export offensive launched after the 2001 crisis, exports have crept up to account for a significant proportion of the economy. We say crept because it is not possible to understand this from looking at the export figures. It must also be for this reason that we have not come across another person or institution that had noticed this development. The impact of the growth in exports can be seen in the data for national income calculated by the Turkish Statistical Institute (TurkStat) according to the expenditure method. Moreover, as growth is calculated on the national income data in fixed prices, the exports of goods and services item is calculated in fixed prices. As a result of all of these factors, the share of exports in the national income accounts is far greater than their share in the economy when calculated in nominal prices.

The Role Of Exports Has Increased
Let’s leave aside the comments and look at the statistics. You can see a chart we have prepared on this topic. In that graph we see that the share of real exports of goods and services in Gross Domestic Product (GDP) rose rapidly after the 2001 crisis. As a result of this increase, the share of exports of goods and services in GDP, which had been under 20 percent 20 years ago and 30 percent at the time of the 2001 crisis, rose to approximately 50 percent. This rate is far above the rate of one of the other two factors which play an important role in growth, namely the rate of investments in national income and approaches the rate of the other, namely the share of private sector consumption in national income.

I mean, the growth in exports after the 2001 crisis reached such a point that it now plays a more important role in growth than investment expenditure. And the role of exports in growth is fast approaching that played by private sector consumption. These developments mean that the Turkish economy has finally attained the level that it has been trying to achieve since 1980 of ‘export-driven growth’.

Inflation Very Close To The Edge Of The Path
The Central Bank has set a year-end target for inflation of 4 percent and has specified quarterly targets on the way to this goal. However, it has added uncertainty bands two points either side of this main target which it has called the ‘path consistent with the target’. According to this ‘path consistent with the target’, inflation should have been 9.2 percent in March. If it failed to match this figure, inflation should have at least been between the upper and lower bands of 11.2 percent and 7.2 percent respectively.
But inflation was 10.9 percent in March, well above the target. But it did not exceed the upper limit of the uncertainty band at 11.2 percent.

The fact that inflation remaining within the uncertainty band saved the Central Bank from having to take up its pen, recalculate and write a new letter of intent. But inflation was so close to the edge of the path that it looks as though this will prove only a temporary respite. If inflation does not fall below the upper limit of uncertainty band of 8.7 percent in June, the Central Bank will have to write that letter. Inflation is expected to fall from April onwards but its current level is well above the Central Bank’s forecasts and it look highly unlikely that it will dip under 8.7 percent by the end of June. In addition to the Central Bank’s inflation targets, there are also the forecasts contained in its Inflation Report, which is published every quarter. According to a graphic in the latest Inflation Report, which was published in January, the Central Bank’s forecast for inflation at the end of March was 9-10 percent.