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Threat Of Recession Is Increasing

05.09.2015 12:40

I recently pointed out the appearance of a threat of recession (“Recession threat has appeared,” Aug. 24).Various economic figures from this week confirm that this threat is increasing. According to “unofficial” August foreign trade statistics published by the Customs and Trade Ministry -- Turkish Statistics.

I recently pointed out the appearance of a threat of recession (“Recession threat has appeared,” Aug. 24).
Various economic figures from this week confirm that this threat is increasing. According to “unofficial” August foreign trade statistics published by the Customs and Trade Ministry -- Turkish Statistics Institute (TurkStat) official figures published a month later confirm these unofficial data with only marginal deviations -- there was a big drop in imports from $19.5 billion to $16 billion on an annual basis. Roughly half of the difference of $3.5 billion in imports is due to low energy prices but the other half can mostly be explained by a decline in imports of intermediate and investment goods. This fact might clearly be considered as a sign of an eventual recession.
Inflation in August also had an unwelcome surprise, increasing more than expected. The annual increase reached 7.1 percent, even though the rate was expected to remain under 7 percent. The last forecast of the central bank for the end of the year, which was increased to 6.9 percent in its last inflation report, has already been mocked. Let me note the official inflation target still remains at 5 percent. The details of the inflation reveal that the increase this time was not due to strongly increasing food prices but to the pass-through effect caused by the depreciation of the lira. For example, the monthly increase of hotel and restaurant prices reached 2.1 percent in August while the whole consumer price index (CPI) increase was limited to 0.4 percent, though the average market expectation was 0.1 percent. Along with the increase in inflation, the interest rate of two-year term Treasury bonds -- considered as a leading market indicator -- increased by over 11 percent, revealing the deterioration of inflation expectations.
On the other hand, the depreciation of the lira continues unabated. Thus the pass-through pressure on prices continues. I made a rough estimation for the year-end inflation. Considering the inflation level of 5.3 percent attained after the end of the first eight months and adding to this my estimation of 3.6 percent for the remaining four months, I believe the year-end inflation rate might even reach 9 percent if the drift of the lira is not halted. This is quite possible as the central bank management still seems to be under political pressure in the context of the election that prevents the bank from reacting appropriately. Adding the expected monetary policy move soon by the US Fed and the political uncertainties regarding the outcome of the early election to be held on Nov. 1, we can expect a continuation of the drift of the lira.
Furthermore, political as well as economic stability is not at all guaranteed in the aftermath of the new election. As I already noted in my previous article, Ali Babacan, the deputy prime minister in charge of economic affairs for the last 13 years, will not run in the election. I think that even in the event that a single-party government is formed following the new election, this decision implies nominating a new economic team close to the economic view of Recep Tayyip Erdoğan, particularly concerning a monetary policy that is far from promising in terms of economic stability.
The persistent depreciation of the lira as well the increase of market interest rates will certainly have an adverse direct effect on investment plans through increases in investment costs. The consumer confidence index has fallen to its lowest level since the global economic crisis. On the other hand, political uncertainties prevent most domestic and foreign investors from implementing their projects. Under these circumstances, we should expect at best further weakening of economic growth, if not a recession in the near future.
How will this suffocating atmosphere affect the behavior of the so-called “independent” voters who truly care about stability? This will depend on who they consider responsible for the current turmoil and how they analyze the solution.

SEYFETTİN GÜRSEL (Cihan/Today's Zaman)



 
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