Turkey’s second-quarter growth rate came as a big disappointment to Ankara, hushing boastful ministers who had bragged of outperforming European economies. When gross domestic product (GDP) was reported to have grown 4.7% in the first quarter, Economy Minister Nihat Zeybekci declared on television, “We’ve grown faster than 33 European countries. Any slowdown in the coming quarters is out of the question.”
Only three months after Zeybekci's June 10 statement, the rate fell to 2.1%, less than half of the 4.7% that Zeybekci proclaimed as unshakable. This new data, announced last week, left not only the minister embarrassed, but Ankara’s year-end target of 4% out of reach.
Zeybekci also said the following in June: “Some institutes and credit rating agencies have been revising downward their growth forecasts for Turkey. Such an eventuality is impossible technically and arithmetically. We are a government that feels the pulse of all [economic] actors and dynamics. We are equally confident for the second and third quarters. Turkey will boost its exports, output and growth rate and move ahead, strengthening this chain.” All Zeybekci's ambitious projections, however, came to naught, with the economy's overseers already at work on a downward revision of the year-end target.
Another danger also lurks. The government has made it a habit to blame any failure on imaginary enemies, among them “interest rate lobbies” and credit rating agencies. If this populist game continues, and the Central Bank remains under government pressure to cut interest rates, Turkey's lira risks a free fall, beyond any control. This, however, appears to be where the government is headed, with Zeybekci blaming the second-quarter slowdown on the Central Bank’s high interest rate policy.
Lowering interest rates while inflation is on the rise would carry the risk of scaring off foreign capital inflows. Moreover, making such a move when the United States is said to be planning rate hikes could prove a huge gamble for Turkey, which relies heavily on short-term capital inflows, or so-called hot money.
In this context, Turkey needs to reconsider its construction sector, which the Justice and Development Party (AKP) has made the economy's main stimulant, thus creating “imaginary growth.” What Turkey needs, however, is industrial investment and real output, but the latest data show a decline in industrial activity and private sector investment in factories.
“The sectors on which Turkey relied for growth over the past decade are done with their mission,” said Erdal Bahcivan, head of the Istanbul Industry Chamber. “For further growth, Turkey needs to change tracks and focus on industry and manufacturing.”
Turkey’s overall GDP growth rate stood at 3.3% for the first half of the year. First-quarter growth was driven primarily by exports, which were up 11.4%. Though their increase slowed to 5.5%, exports remained the main driving force in the second quarter. The financial sector — often vilified as an “interest rate lobby” under Islamic visions of interest-free banking — remained a major contributor as well. Financing and insurance services expanded 7.1% at constant prices in the second quarter, which translated into an overall expansion of 10.7% in the first half of the year and a 1.28 point contribution to the overall 3.3% growth rate in the same period.
The second-quarter data contain an alarming indicator. Seasonally and calendar-adjusted GDP decreased 0.5% compared with the previous quarter, meaning the economy contracted for the first time since the first quarter of 2012. Why? Because Turks have put the brakes on spending, affecting output and therefore growth. Consumer spending rose a mere 0.4% in the second quarter.
Turkey falls in international ranking
Turkey’s GDP has grown during AKP rule. The rates, however, matter. Is growth under the AKP greater than under previous governments?
Last week, the daily Cumhuriyet published a remarkable study countering AKP claims of unprecedented economic progress under the party's management. “According to the AKP, the GDP grew 3.7 times, from 350 billion to 1.655 trillion Turkish lira. Yet, to see the real growth, one needs to calculate it with constant prices. Accordingly, under the AKP’s 13-year rule … the average annual growth rate stands at 4.6%. In the period from 2008 to the second quarter of 2014, it is 3.4%. One needs to recall that average growth in the three decades before the AKP was between 4 and 4.5%,” the report said. Hence, the AKP government has not really outdone previous governments. The figures are more or less the same.
Another AKP ambition — to make Turkey one of the world’s top 10 economies by 2023 — appears beyond reach as well. The country’s annual GDP, which totaled $820 billion in 2013, fell to $797.5 billion as of the second quarter of 2014. The $22.5 billion difference moved Turkey a step down, to 18th place, among the world’s largest economies, as the Netherlands took over the 17th position, with $800 billion, according to Cumhuriyet.
So, where is the Turkish economy headed? Is the outlook deteriorating? The crises in Syria and Iraq, the turmoil in Ukraine and the prospect of rate hikes in the United States are all harbingers of harder times for Turkey. Privatizations totaling $50 billion, public works and construction have kept things going thus far, coupled with unregistered capital inflows spurred by abundant global liquidity, regional developments and other factors. The global conditions, however, are changing, and regional tensions are on the rise.
Erinc Yeldan, economy professor at Ankara’s Bilkent University, points out that Turkey's industrial output shrank, from 25% to 15% of GNP, as the government kept encouraging construction. A growth model relying on the building sector alone, he warned, “will leave Turkey under the rubble of AKP constructions.”
The Fitch credit rating agency, scheduled to review Turkey on Oct. 3, cautioned last week that Turkey’s “economic rebalancing [is] becoming more challenging.” If the agency proceeds to downgrade Turkey, capital inflows will further decrease and could make the task of rebalancing even harder. Let us see how long the AKP’s infatuation with construction will continue and how long the construction sector will keep distracting Turkey.