Record attempt in growth

As it had for the three previous years, the Turkish economy closed 2005 with growth of over 5 percent and equaled the record set in 1950-45 for the longest sustained period of rapid growth. It has now earned the right to attempt to break the record in 2006. If growth this year is also over 5 percent then the Turkish economy will have grown by more than 5 percent for five years in a row for the first time in the republic’s history.

Achieving as long a period as possible of economic growth is important from the perspective of realizing Atatürk’s goal of ‘attaining the level of contemporary civilization’. Today achieving this target basically means reaching the levels of welfare of the European Union (EU), with whom membership negotiations are still continuing. The faster Turkey can grow, the sooner it will attain the welfare levels of the EU. Making rapid progress in this regard over the next ten years will also be a factor that will facilitate membership of the EU. If growth proceeds like the Mehter Ottoman military marching band – two steps forward, one step back – then this will delay both EU membership and ‘attaining the level of contemporary civilization’.

We have a poor record when it comes to stable growth
In fact, there have been many years in the history of the republic when the Turkish economy has grown by more than 5 percent. The economy has grown by more than 5 percent, which is the threshold we accept for rapid growth, in 43 of the 82 years since the republic’s foundation. But it has been very rare for these years of rapid growth to follow one another in succession.

The longest period of rapid economic growth during the above-mentioned period is four years. When we include 2002-2005 there have been just two of these ‘quadruple’ periods.

There have been three occasions when the economy has grown rapidly, that is by more than 5 percent, for three years in a row.

On eight occasions the economy has grown rapidly two years in succession and on 10 times occasions it has grown rapidly one year and then slowed the next.

In the period 1981-96 South Korea grew by more than 5 percent for 16 years in a row. When we consider that China has posted similarly rapid growth for 14 years in a row since 1991, then Turkey’s performance in this regard is very poor. During its period of rapid growth, South Korea progressed from Turkey’s level to that of a developed country. In order to achieve the same target Turkey needs to have a similar period of rapid growth.

The latest situation as regards growth
When we look at the basic indicators in order to get an idea as to whether or not the record for rapid growth will or will not be broken this year, we find the following results:

* The performance of industry affects growth the most as it accounts for a large share of the economy. Industry did not get off to a very good start this year. In January industrial production declined by 6 percent. But this fall is partly attributable to the nine day religious holiday, the bad winter conditions and the problems in the natural gas pipelines from Russia and Iran. However, industrial production rose by 5 percent in February and showed that the fall in January was only temporary. In March the capacity utilization rate in manufacturing industry stood at 80.8 percent, which is 0.3 percent above the rate for the same month the previous year and suggests that the industrial recovery has continued.

Domestic demand is strong
* The boom in domestic demand played a major role in the rapid economic growth in 2005. When we look at the values for the indicators related to domestic demand over the first months of the year we see that this boom has continued. For example, in the first three months of the year automotive sales increased by 10.2 percent. In the first two months of the year sales of white goods rose by 18.5 percent.

* The increase in investments, which had provided support for growth for two years, also continued. In the first two months of the year imports of investment goods rose by 26 percent. There was an extraordinary growth of 92 percent in investments with incentive certificates during the first two months of the year.

* The indicators related to foreign demand are not so good. According to the Turkish Statistical Institute, exports rose by only 1 percent in the first two months of the year. But the figures for March released by the Turkish Assembly of Exporters (TİM) indicate a rise of 13.2 percent. This shows that there has been an improvement in the export of goods. But the decline in the number of foreign visitors over the first quarter of the year does not bode very well for tourism revenue and thus for the export of services.

There will be a slowdown in the first quarter
When we evaluate all of the data together, we reach the conclusion that growth will not be very high during the first quarter of the year. Industry, which accounts for nearly 30 percent of the economy, single-handedly has an important impact on growth. If over the months ahead the figures for the first two months are not revised upwards, it looks as though the rate of growth in industrial production will be around 3 percent. The performance of the export of services and goods during this period will also have a limiting impact on growth. Even if the booms in domestic demand and investments go some way towards compensating for the poor performance of exports and industry, then there still appears to be a high possibility that growth in the first quarter will be less than 5 percent.

In this situation the realization of the growth target of 5 percent, and consequently of breaking the record for sustained high growth, will be dependent on the performance in the remainder of the year.

The recovery in industry and the export of goods indicates that growth may accelerate in the remainder of the year. Domestic demand and investments were anyway strong in the first quarter of the year. It is clear that the extent of the possible support for growth from tourism will not become clear before the summer months. But even if the problems in tourism continue it appears that other factors may facilitate an economic performance that will result in the attainment of the 5 percent growth target.

THE YILMAZ ERA AT THE CENTRAL BANK
Durmuş Yılmaz, who has been appointed as the 20th governor the Turkish Central Bank, has inherited a good legacy from Serdengeçti in terms of the basic aim of the bank of banks, namely price stability. But the fact that Serdengeçti’s legacy also includes problems such as high unemployment and a large current account deficit means that it does not look as if Yılmaz will have an easy time. These problems are likely to trigger an increase in complaints and it seems that Yılmaz is in for a rough ride.

It looks as though the rising trend in inflation is the result of the boom in domestic demand. In order to rein in inflation again in line with the target, Yılmaz may be forced to take a decision to hold steady or even increase the interest rates which were continually reduced during the Serdengeçti era; and this will please neither the business community nor the government.

The Central Bank may be forced to sacrifice some growth in order to achieve the target for inflation. But if unemployment, which is already high, is not going to become even more widespread then growth must not fall below 5 percent.

Production in Turkey is dependent on imports, which means that, at least in the short term, it will not be possible to reduce the current account deficit without cutting growth. Yılmaz will have both to strive to ensure that financing the current account deficit does not become a problem and to withstand the pressure engendered by the current account deficit.