Reflecting on economic growth
The same-day release of data on Turkey’s second quarter economic growth and July’s current account deficit has provided an opportunity to see the pros and cons of the economy’s performance, while also underlining how the two sets of data are intertwined.
Gross domestic product growth in the second quarter was 8.8 percent on an annual basis – much higher than expectations of a 6.5 percent rise. Seasonally adjusted data points toward a 1.3 percent rise in GDP compared to the previous quarter; smaller than the 1.7 percent in the first quarter but an impressive increase nevertheless. Also of note is the upward revision of annual growth in the first quarter, from 11 to 11.6 percent. This is in stark contrast with the downward revisions we have become accustomed to coming from developed economies.
A breakdown of the data yields more interesting results. The contributions from private consumption and investment spending are 6.3 and 6.6 percentage points, respectively. Public spending has had a contribution of 1.1 percentage points.
On the other side of the coin lies the traditional killer of potential growth: The contribution of “net exports” has been minus 5.2 percentage points.
Thus, private domestic spending is the locomotive of Turkey’s growth, while net exports (exports minus imports) is once again negative, acting as the main drag on expansion.
That drag was laid bare in the current account data: As of July, the seven-month cumulative current account gap, which puts the robust growth outlined above to the mercy of foreign capital, stands at $50.7 billion. This corresponds to an alarmingly high 11.7 percent of GDP. “If we take first-half growth as 100, 11.7 of that comes from the current account deficit - the dollars that we brought in from abroad and spent,” explains Güngör Uras in his Milliyet column.
The financing of this deficit, meanwhile, has turned into a puzzle. Central Bank data show that in the first seven months of 2011, $10.6 billion in “unaccounted for” foreign cash entered Turkey - making its appearance under the “net errors and omissions” title. Speculation abounds as to the source of this cash, but cash fleeing from Middle East revolutions is a compelling explanation. In that sense, data from the Bank for International Settlements - Quarterly Review report, which remains under embargo as I write this column, should be watched carefully.
The rest of the financing picture is also complicated: In the first seven months, foreign direct investment, which is deemed stable capital, totals only $2.6 billion. Foreigners have sold equities to the tune of $672 million in the period, while the amount of foreign investments in government bonds stands at $17.3 billion. An exposure of this kind to short-term foreign investment should be a matter of separate discussion.
All recent domestic financial crises happened because of a current account deficit running too high - we may elaborate on these past crises later on. But that’s why many local and foreign economists are “obsessive” with this issue. History does not have to repeat itself - today’s global and domestic conditions have their own dynamics. Nevertheless, if Turkey fails to address the root of the problem, this gap will continue to hang over economic growth like the Sword of Damocles.