The Kapali Carsi

Short take on latest Turkish data: General Themes

We had/are having important data this week in Turkey. I already wrote about consumer confidence in my latest post, and let me try to bring out a few general themes from the other releases rather than try to examine each in detail; after all, you have the analyst/market economist reports for that.

External Rebalancing: The current account deficit came in lower than expected in November, almost like a prelude to the rebalancing to come because of the slowdown this year. But the downside is that capital flows are also set to retreat, even if the political crisis is solved.

The construction sector is alive and well, but for how long: Two sets of data revealed a lot about construction. First, REIDIN residential property price indices showed that prices rose in December, even more so in Istanbul. I was really worried in the summer of 2012 that we would see mini-bust of the real estate boom because of the supply-demand mismatch. Demand has turned out to be strong since then, keeping prices rising- for now… Second, once adjusted for seasonality, it turned out that most of the gains in employment in October were coming from the construction sector. Of course, given the sector’s involvement in the graft scandal as well as the weak lira (a recent Central Bank study, based on survey data, claims that 70% of total debt in the sector is FX debt; I would guess that most of that debt is short-term), questions remain on the health of the sector this year.

Unemployment: Speaking of the devil, seasonally-adjusted data showed a fall in unemployment in October, but that is not surprising, given that the the economy grew 4.5 and 4.4 percent in the second and third quarters of 2013 and that unemployment is a lagging indicator. In fact, Istanbul think-tank Betam, whom I consider to be Turkish labor market experts, noted that while the increase in the labor force was in line with structural trends, the rise in employment was in line with growth of around 4 percent. As with construction, the key question is whether unemployment will rise in 2014- and the answer depends on growth. Most Turkish economists would agree that you’d need growth on the order of 3-3.5 percent to prevent unemployment from rising.

Budget: Last but not definitely not the least, the budget! Finance Minister Mehmet “Nominal” Simsek’s pride and joy- the lowest deficit to GDP ratio since 2006 that he announced to great fanfare on Wednesday. On the face of it, the figures do look impressive, but it is important to add in two small but important footnotes. First, the strong turnout was driven by value-added taxes, for imports as well as domestic goods. With the impending slowdown in domestic demand, you should not expect such a strong contribution from these items this year. More importantly, as the IMF recently noted in a blog post on the Turkish economy, the budget is not flexible, in the sense that a significant chunk of the expenditures is made up of “non-discretionary primary spending such as compensation to employees and transfers to social security”. On the revenue side, the dependence on indirect taxes means that revenues are extremely correlated with economic growth. In plainspeak, no growth, no taxes…

I apologize if this seemed a bit disorganized; it is past 1am in Turkey, and I am really sleepy. However, I am planning Friday’s Hurriyet Daily News column on the same topic, and so I should present it a bit more organized there…

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