7 percent current account deficit, 7 percent GDP growth
Today, we will read statements from politicians talking about Turkey’s “7 percent GDP growth record,” which is highest among G-20 and OECD member states.
On the other side of the coin is the current account deficit, which corresponds to 7 percent of GDP and inflation that runs 7 points above the target. This tells us that this GDP growth is unsustainable and growth will ease and there will be stagnation.
The 7.4 percent growth recorded in the first quarter of 2018 is the highest since the first quarter of 2014. Here are the main points: On the production side, the manufacturing sector expanded at 9.3 percent and the service sector registered a 10 percent growth. The construction sector grew by 6.9 percent. Almost all production-related industries registered expansion rates higher than expansion rates in the same quarter of 2017. Let’s ask this question: If we have such a wonderful growth rate, why do businesspeople from different industries complain? This happened not so long ago, but in the January-March period.
On the expenditure side, household spending, which accounts for 60 percent of national income, increased by a seven-year record of 11 percent. Durable goods expenditures were up 4.8 percent, while non-durable goods expenditures, which account for a third of all household expenditures, increased by 14.5 percent. Services expenditures, which account for 45 percent of total household spending, were up 10.9 percent—the highest figures for the last two sectors on record in the past seven years.
Investment spending, which corresponds to 30 percent of GDP, increased by 9.7 percent in the quarter, the highest rate on record in the past four years. Construction investments rose by 12.3 percent.
Unfortunately, this picture does not validate the argument that “we have broken records, they are all jealous of us.” Household expenditures that increase imports mean placing more orders for goods produced by those who are “jealous of us.”
In the second and following quarters, we may not even have a growth rate of 4-5 percent. Why? Because of the failure to read into capital flows. Even if this assessment is done appropriately, proper monetary and fiscal policies are not in place.
The underlying problem is still here: We are far from ensuring sustainable growth.
The current account deficit data released on June 11 unveiled the cost of the economic growth and how it is financed through borrowing. Any developed nation does not possibly envy a nation that spends beyond its means and grows by borrowing. They only cheer this nation, because it means they will be able to sell more goods to this nation and keep lending it in order to help it finance this spending spree. This is what has happened to date.
While in the first quarter of 2017, Turkey’s current account deficit was $8.4 billion while its national income was $176.1 billion. In the same quarter of 2018, the current account deficit rose to $16.4 billion and national income was $207.9 billion. The current account deficit/GDP ratio soared to 7.87 percent in 2018 from 4.76 percent in 2017.
That is why a “bright future” based on consumption is unsustainable. Turkey believed the prosperity it enjoyed was its own product but in fact it was based on cheap and abundant money made available in developed nations. Thus, when “blood flow” declines it causes violent “throbs.”
What happens in Turkey is what happens to any country that finances its large current account deficit with short-term capital inflows but fails to implement proper policies.
At a time when high inflation accompanied the large current account deficit, Turkey, who had been discussing “slashing interest rates,” was faced with the exchange rate shock.
The Turkish Central Bank was late to respond and the price it paid for inaction was lifting interest rates by a total of 4.25 bps on May 23 and raising the long-term rates. The yield on two-year bonds rose to about 19 percent.
The Central Bank’s reserves declined by $6 billion over the past 40 days. This signals problems in the financing of the current account deficit.
All these are the emerging signs of stagnation but the country cheers the growth rate.