Is the worst really over?
In this econ-only report, we share our latest thoughts on the recent macro developments in a Q&A format, as our politics author thought he would be much better positioned to update our esteemed readers soon after the G20 meetings are concluded.
Markets are constructive on Turkey’s economic prospects nowadays, for which there are some good reasons, but to conclude from here that the worst is over, or that Turkey could recover on its own after experiencing a shallow recession of sorts, still feels like wishful-thinking to us.
Economic activity has begun to contract around late Q3/early Q4, we think, even though the Q3 GDP print as such, to be released on December 10th, should show modestly positive year-on-year growth. With growth in negative territory, the current account deficit (CAD) is shrinking very rapidly. After today’s trade print, in fact, we estimate that the CAD must have narrowed further to around $39 billion in October, from some $46 billion in September – and a peak of over $58 billion as recently as in May. Inflation, too, may positively surprise in November, thanks to the sharp lira appreciation, tax cuts, “campaigns” and other kinds of interventions.
But contrary to the slowly emerging consensus and optimism, the worst is hardly over. For one thing, the CAD is narrowing not because the economy is undergoing a relatively benign “rebalancing” dynamic, but because domestic demand is collapsing, which, in turn, is magnifying the bad debt problem. The government is scrambling to find a solution for the latter, which is encouraging, but a bold and comprehensive plan is still amiss.
Inflation, too, is likely to look better than the consensus had predicted just a few months ago, but volatility will be the name of the game going forward. Moreover, despite negative growth, further lira weakness down the road, unmoored inflation expectations and a relatively accommodating fiscal stance may keep inflation elevated a while longer.
Perhaps most disturbingly, with the urgency of the summer months having passed, Ankara seems to have become complacent, choosing piecemeal, unorthodox and at times crude and highly distortionary interventionism, over bold, comprehensive and orthodox solutions, in sharp contrast to the promises in the New Economy Program. This is concerning not only because this is likely to deepen the economic malaise, but also because it might lead to policy mistakes, like premature monetary and fiscal easing, and/or even heavier interventions down the road, particularly if AKP’s performance continues to slip in the polls in the run-up to the end-March local elections.
Now read on...
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