“Exhausted growth” cannot carry the country to 2023

The contribution of expenditure items to economic growth is an interesting finding in the TÜİK (Turkish Statistical Institute) national income reports for the third quarter.

The growth rate appears to be 0.9 percent, but production that is geared toward increasing inventory seems to have contributed an increase of 3.2 points. Without production to increase inventory, we would be seeing a continued recession: A decrease in investment in the same quarter triggered a 3.5 point decrease in the growth rate.

The only reason we are seeing 0.9 pct growth this quarter, which was deemed a “recovery” in the economy, is thanks to production that went into inventory.

In reality, the economic recession is still in effect. Private consumption, which constitutes 57 percent of total national income, contributed a mere 0.9 point increase. Government consumption expenditure, which is 14 percent of total national income, also only contributed a 0.9 point increase to final growth rate.

Household consumption, which constitutes two-thirds of the economy, is at such a slow pace that public consumption, which makes up just one-eighth of the economy, can trigger the same amount of growth by functioning full throttle.

Another interesting finding is the continued decrease in investment and the inability to bring that decline to a halt. While private consumption was able to swing upwards in the third quarter, investment continues to dip.

Both the consumption and investment data in the third quarter show a tendency toward “exhausted growth” in the private sector. I wrote at the end of October that this is the picture of weak, anemic growth. 

When you look at the “big picture,” the last five years paint a clear image of an increase in the role of public consumption in a landscape where government spending is going full-force and the private sector is pulling back on consumption.

Credit growth rates were zero in the third annual quarter, so it’s notable that a 0.9 pct growth rate was achieved through an increase in inventory.

If the current fourth quarter delivers a 2.5 percent growth rate, the annual growth rate will even out at zero, and a contraction will be avoided. The government, however, predicts an annual growth rate of 0.5 percent, which would require the last quarter’s growth rate to be 4.5 percent; this seems very unlikely according to the current trend.

Because Ankara was managing the economy by covering up structural weaknesses, they could not predict the emergence of an economic crisis from international political crises. Ankara failed to take precautions from 2013 to now because they underestimated the gradual decrease in global capital flow and high national liquidity, which led to increased loans being taken out.

It wasn't surprising that a political crisis with the United States in August 2018 triggered the economic crisis. However, residents were terrorized when this political crisis was represented as a “war on our economy” in order to gather votes.

With the addition of poor crisis management, foreign creditors stopped landing and national household consumption plummeted.

Companies in Turkey were faced with the economic crisis with the highest debt ratio in Turkey’s history. 

The average rate of loans granted to non-financial firms in relation to gross domestic product was 20 percent from 1989, when capital accounts were liberalized in Turkey, until the 2009 global financial crisis. When the economic crisis started in August 2018, this rate was 80 percent.

In comparison, Turkey was in the lead amongst developing countries when it came to growth in financial leverage.

After a sudden stop in the economic crisis and the following credit crunch, firms not just in Istanbul but also in Anatolian cities are thought to have failed to pay off loans, and some declared concordate.

Meanwhile, Ankara is trying to pump out credit through the public banks and in the last quarter, these efforts have been focused on housing loans. According to real estate data, these loans are flowing to housing that has been previously owned, not newly-built housing that has failed to sell.

What's interesting is that private and foreign banks do not share the public banks' enthusiasm on this matter. Maybe it's not that surprising, as they can see the growth in their loan portfolios and the clients’ inability to pay it back. They differ from public banks, though, because they don't have ‘public cash’ to which they can charge their losses.

Ankara, having survived so long by letting structural problems fester, is no longer successful at sustaining voter enthusiasm by feeding into political crises at home and abroad.

The business sector is unable to create jobs, as they are suffering to create enough revenue can pay off their debt. Exporters are at a deadlock because of the increased production costs that exchange rates have caused. Nearly a million people are unemployed, or have experienced a decrease in income in last 12 months. Households have pulled back on consumption following a decrease in disposable income triggered by inflation.

The economy is out of energy. With the economy in this weak and feeble state, Ankara cannot carry the country politically to 2023.