The Age of Stability

The slowdown in growth rates is an expression of macroeconomic stabilisation. Turkey's real GDP increased by 4.8% year on year in the first quarter of this year, slowing from 9.0% in 2004 and an average of 7.7% in the previous 12 quarters. Although the latest reading may be disappointing compared to the consensus forecast, it is right in line with our own projection and a convincing reflection of the stabilisation of growth dynamics. Indeed, we are puzzled by consensus estimates suggesting a peculiar growth trajectory. The consensus expectation of 5.7% for the first quarter is not consistent at all with the annual growth estimate of 5.0%, even if we consider just base effects that point to a stronger performance in the second half of the year. Furthermore, according to our calculations, real GDP posted a seasonally adjusted quarter-on-quarter increase of 2.9% that implies an annualised rate of 12.1% in the first quarter. Albeit lower than a staggering 17.1% in the last quarter of 2004, it is still consistent with our annual growth projection of 7.2% in 2005 and 6.8% next year.

With the easing of pent-up demand, the economy is growing at a sustainable momentum. The growth rate of consumer spending decelerated from 10.1% in 2004 to 4.0% this year, due largely to a marked slowdown in the category of durable goods from 29.7% to a mere 1.5%. Once again, this is a manifestation of stabilisation, not a harbinger of economic contraction. Thanks to lower interest rates and improving credit availability, household spending on durable goods surged 64.2% in the last three years. However, fundamental factors, like changes in labour income, are slowly regaining weight in shaping consumer behaviour. Although we expect a gradual recovery in the labour market that should bring a reasonable increase in real wages, disposable income will not improve much in the foreseeable future given the tight fiscal stance. Furthermore, households have started feeling the real financial burden of interest payments on loans and credit cards and higher energy prices that lower discretionary income.

The continuing increase in fixed investment will keep expanding Turkey's supply frontier. Following the rest of the economy, the corporate sector is taking stock of an astounding rise in investment spending in the post-crisis period. The growth rate of fixed investment outlays declined from a cumulative increase of 75% in the past two years to 4.8% in the first quarter of 2005. Nevertheless, coupled with the rationalisation of government spending, we expect a reasonable increase in business capital expenditures, expanding the country's supply frontier and supporting the disinflation programme. Construction will become an important engine of growth, supporting the labour-market recovery. After suffering a cumulative contraction of 10.1% in the 2001-2004 period, the sector already grew by 16.5% in the first quarter of this year. In the meantime, the country's exports continued to expand at a robust pace, rising by 11.3% year on year in real terms on top of a 45% increase in the previous three years. On the other hand, the growth rate of imports decelerated to 9.3% in the first quarter, from 24.7% last year and an average of 22.7% in the last 12 quarters, validating our view that the widening in the current account deficit is not an immediate threat to the Turkish economy.

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Productivity improvements are still at the heart of growth dynamics. The uninterrupted output growth, at an average of 7.4%, in the last 13 quarters is driven partly by the country's productivity revival. Labour productivity in the manufacturing sector, for example, increased by an average of 8.3% in the post-crisis period. As we have long argued, productivity gains are not just a result of employment reduction, but also stem from efficiency improvements in the use of all factors of production. Indeed, Turkey's total factor productivity growth surged from an average of 0.5% in the 1990s to approximately 5.0% in the last three years, raising the economy's non-inflationary growth threshold well beyond historical extrapolations and market expectations.

By Serhan Cevik (London), Morgan Stanley EconomisAs published on the Global Economic Foru