Soldier-hawk superstition

Economists should refrain from delving into politics, even indirectly. That’s what I learned on July 1, which was incidentally also the date that sealed the fate of the Turkish economy for the rest of the summer.

I am not talking about my argument in last Friday’s, June 27, column that the presidency is not in the bag for Prime Minister Recep Tayyip Erdoğan, who announced his candidacy among cheers and tears on July 1. It is true that recent polls show his support at over 50 percent, which would grant him a first-round victory.

However, I believe ultra-secularist voters, who are not the happy about the opposition’s choice of a pious candidate, will nevertheless vote for Ekmeleddin İhsanoğlu, rather than boycott the elections, to prevent Erdoğan from becoming president more than anything else. Erdoğan is more likely to win than not, but it may be a tight race.

It is my prediction on the economic impact of the Iraq war that seems to have gone the drain. According to preliminary data from the Turkish Exporters Association released on July 1, exports to Iraq decreased 21 percent annually in June. Since Turkey exports mainly to Northern Iraq, I wasn’t expecting exports to come to a full stop. I was actually working with a 25 percent decline, and so the turnout was not a big surprise for me.

However, I seem to have underestimated the effect on the rest of the economy. According to the latest purchasing managers’ index (PMI) from HSBC released on July 1, Turkey’s manufacturing sector contracted in June, as the composite indicator took its lowest value since August 2011. “Firms generally linked falling order inflows to stagnant market conditions and geopolitical uncertainty, notably in the Middle East.”

It was not only producers who were stepping on the brakes in June: Business channel CNBC-e’s preliminary consumer confidence index, released on the same day, plunged. The fall was across the board, as the overall index, as well as the subcomponents for expectations and appetite to buy durable goods, declined around 10 percent.



At a speech at the IMF the next day, Federal Reserve Chair Janet Yellen confirmed the U.S. monetary policy would stay loose. This is good news for emerging markets, especially those like Turkey that depend on external financing to grow, but a slowdown driven by geopolitical factors is the last thing Erdoğan would want before the presidential elections in August.

He is, therefore, likely to undertake serious pork-barrel spending this month and the next and ask for a “real rate cut” from the Central Bank at this month’s Monetary Policy Committee meeting on July 17. Never mind that the recent rate cuts will not affect the economy before the fall.

Never mind, also, that monthly inflation, at 0.3 percent, turned out to be higher than expectations in June. Annual inflation fell from 9.7 to 9.1 percent because base effects, and is likely to continue falling during the summer. After that, we should see the impact of loose monetary and fiscal policy, as well as the postponed gas and electricity price hikes, on inflation.

If nothing else, the rate cuts and the decline in inflation should vindicate Erdoğan’s theory that lower interest rates beget lower inflation. In homage to psychologist B.F. Skinner’s “superstitious pigeons,” I would like to call this the “soldier-hawk” superstition, the literal translation of Erdoğan.