In a report prepared ahead of the G-20 meeting in January, the IMF lowered its growth forecast for Turkey from 2% to 0.4%. In an article published February 1, I wrote: “The IMF is talking nonsense," and that there had to be a reason for such a major change. I wrote that such a low growth rate could only be caused by a serious credit crunch arising from Europe’s debt crisis. But the IMF was not predicting financial collapse for Europe.
Now, in its most recent World Economic Outlook report, the IMF raised its forecast for Turkey’s economic growth back up to 2.3%. No explanation was given for why the number was changed, and only the figures for Argentina and Turkey were revised. I don’t know how much the IMF revised Argentina’s predicted growth rate, but I doubt that the change could be as dramatic as the one it made to Turkey’s.
If I am wrong, Mark Lewis (the IMF's senior representative in Turkey), feel free to correct me. Meanwhile, perhaps, he would be able to explain the reasons behind such a dramatic revision. My guess is that the IMF has been having trouble with working out its predictions for the Turkish economy. Those who prefer conspiracy theories could surely cite other reasons. The IMF keeps saying that the European economy, which is currently growing at about 0%, will experience a moderate recession in 2012, and that worst-case scenarios are unlikely. If this is true, why has Turkey’s growth rate been revised in the opposite direction, from 0.4% to 2.3%?
Defining a Soft Landing
Now that we have the most recent data, let us now return to the “soft landing-hard landing” debate. A 2.3% predicted growth rate is just past the threshold for a "hard landing.” A "soft landing" would mean a growth rate of about 4%, as well as a reduction in inflation by at least 7% and in the current account deficit by 6%.
Does the latest data support this scenario? It may, perhaps, but there is still one question that must be asked. The critical factor in this soft landing is the positive contribution of net exports to growth. Should domestic demand rise faster than expected — and this may happen — it will be possible for Turkey to achieve a growth rate greater than 4%. But were this to be the case, a moderate correction in current account deficit would not be possible. Foreign-trade figures for January point to potential problems with exports to European markets. Exports to Europe were down $200 million compared to last year. Given our 19% increase in exports to Europe last year, I was hoping — despite the moderate recession prevailing in Europe — that our exports would rise a bit. Perhaps I was too optimistic. While exports to other markets are on the rise, exports to Europe now appear to be slowing down. On the other hand, imports keep rising. This is not due to an increase in oil prices, but it rather reflects a boom in our domestic demand.
Obama’s Important Move
From the data within the IMF’s latest report, we have noted a global decrease in prices for agricultural products, food and raw materials. This is good news for inflation. However, the most critical factor that will make or break a soft landing, after developments in Europe, are oil prices. The embargo on Iran could keep these prices high. If you add to this an Israeli attack, you can forget about a soft landing. Luckily, Obama offered us some good news in this regard when he cornered Israeli Prime Minister Benjamin Netanyahu and said, “If necessary, I will bomb Iran. For now, it is not necessary.” Israel will most likely be reined in at least until the upcoming US elections. If the markets are persuaded, oil prices will start to diminish.
The conclusion, then, is there is still a chance for a soft landing for Turkey. However, as the Turkish economy is feeling the boost of international liquidity and a wave of optimism, Turkey might just choose to bypass a landing altogether. If this is the case, we could postpone our debate on what kind it will be until next year.