Turkey Lowers Growth Forecasts as Industrial Output Plummets
The medium term economic plan unveiled by Deputy Prime Minister Ali Babacan today revised its gross domestic product growth target downward for the year to 3.2 percent acknowledging that it will not meet a 4 percent goal. It also lowered its growth forecast for 2013 from 5 percent to 3 percent.
Economic growth in Turkey has been slowing as the debt crisis in Europe, Turkey’s largest trading partner, has reduced consumer spending and as Erdem Basci, Turkish central bank governor, has tightened monetary policy to stem inflation and bank lending. Growth in the second quarter was 2.9 percent, the slowest in more than two years. The decline has prompted the central bank to reverse course and lower borrowing costs and has set off a debate among Cabinet members between advocates of growth and fiscal restraint. Consumer Price Inflation was 9.19 percent for the month of September.
“The government has finally acknowledged that this year’s growth target will be missed,” Inan Demir, chief economist at Finansbank said in e-mailed comments. He called the figure for 2012 “realistic,” while saying that his position for 2013 was more bullish than the government’s given looser global central bank policies. “The government is still too optimistic regarding the extent of disinflation next year and also about the narrowing in the current account deficit,” he said.
The government forecasts year end inflation to be 7.4 percent compared with the previous forecast of 6.2 percent. The number is expected to slow to 5.3 percent in 2013 and 5 percent in 2014. The current account deficit is expected to be 7.3 percent of GDP for the year-end, declining to 7.1 percent in 2013. The plan also suggests a budget deficit of 2.3 percent of GDP declining to 2.2 percent in 2013.
“I find it implausible that an accelerating domestic demand picture will be consistent with a narrowing” current account deficit, Demir said.
Earlier in the month the central bank said that recent tax and energy price changes would affect annual inflation by 1.16 percentage points.
“The magnitude of the revision to 7.4 percent implies that the Bank has factored all of tax and energy price hike effects into its new inflation forecast,” Ibrahim Aksoy, economist at Seker Securities (SEKMENB) said in e-mailed notes.
The central bank has found itself of the political debate between growth and austerity. Economy Minister Zafer Caglayan said earlier today that the industrial output drop was as a result of too much “braking,” referring to comments made by Babacan last month where he compared monetary austerity to a bus driver on a foggy mountain road needing to keep his foot on the brake.
Central Bank Governor Erdem Basci, who varies borrowing costs on a daily basis, has pushed the average cost of funding for banks down by almost half since May. It’s now 5.8 percent, just 5 basis points above the floor of his so-called rate corridor.
Yields on two-year benchmark bonds retreated 5 basis points to 7.63 percent at 6:30 p.m. in Istanbul. The lira declined 0.6 percent to 1.8216 per dollar the lowest level in more than one month.
“Turkey is still a fairly good story in our view,” Piotr Matys, Emerging Markets Analyst at 4cast Ltd. said in e-mailed comments, saying that he thought the growth figures were realistic. “Turkey will be one of the first economies to regain better growth when developed economies gradually emerge from the crisis.”
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