High growth under high interest rates
The Turkish Statistical Institute (TÜİK) announced on Sept. 11 that Turkey’s economy grew over 5 five percent in the second quarter of this year, just as it did in the first quarter.
The first question that occurred to me was: Thanks to the huge treasury supported credit guarantees added to the Credit Guarantee Fund (KGF), credits volume in Turkish Liras have increased the growth rate of 10 percent in second quarter, roughly 100 billion – did this have no effect at all? If our growth is equal to that of the first quarter, then where is the effect of the credits? If this is the growth, how had the credits which grew 10 percent in the second quarter helped?
Furthermore, as you know, the Central Bank raised the interest rates in mid-January, which brings me to my second question. If high interest rates are an obstacle to economic growth (as suggested by some Turkish politicians), then how was it possible for Turkey to grow 5 per cent in both the first and second quarters despite such a high interest rate? We can conclude that 5 per cent growth is possible even during a period when the Central Bank is enforcing the highest interest rate in the last five years –3 points higher than the previous year’s interest rate in the second quarter– and despite giving the money to banks at the end of the day.
The TÜİK data suggest that the industry worked for exports; while the sum of the services of accommodation, commerce and logistics have contributed as much as industry. The investments of construction also helped produce this growth to a certain extent.
Speaking of investments, over half of the investments –which now comprise a portion of 30 per cent in national income with the new method of calculation– are constituted of investments related to construction. The second-quarter growth herein was 25 percent. On the other hand, machinery and equipment investments, which constitute 37 per cent of investments, have shrunk by nearly 9 percent. Ultimately, the sum of investments have grown by 9 percent due to the weight of construction. This rate possibly contains public infrastructure projects, but we cannot know because the public-private ratios are no longer announced.
When investments are increased by constructing a simple building, the income and labor demand are created only for the construction of that building. However, when a factory is built, and machinery and equipment are provided; income and labor demand are also yielded for the future, unlike construction investments.
The TÜİK data demonstrates that while construction has grown at an average rate of 20 percent in last two quarters, machinery and equipment investments have shrunk roughly at a rate of 10 percent in the same period, which is the greatest shrinkage since 2010. To sum up, there is growth in construction, of which we do not know the source; while machinery and equipment investments, which render employment sustained, are going through the most severe shrinkage in history. Guessing the reason behind this is not difficult: Turkey is distancing away from the rule of law and quarreling with its Western partners.
In spite of the 20 percent average growth in construction in the first half of 2017, the calendar-adjusted employment data in construction suggest a decrease. According to the data announced by TÜİK a week ago; while employment in building constructions has decreased 16.8 percent in the first half, employment in non-building constructions has increased 2 percent. When these data are considered, a question mark hangs over the 20 percent growth in construction.
Another remarkable development in the growth data was the revising of 2015 and 2016 data. 2016 data were revised particularly significantly. The impact of the total revisions on the period of three quarters which encompasses the third and fourth quarters of 2016, along with the first quarter of 2017, is not “minimal” at all, as it provides an extra increase of 0.5 percent in national income. The revisions are based on 0.5 percent of household consumption expenditure and 2 percent of public consumption.