Turkey Reports Signs of Economic Recovery

Data recently released by the Turkish Statistics Institute (TurkStat) has raised expectations that the economy might be on its way to recovery. According to TurkStat, the capacity utilization rate within the Turkish manufacturing sector increased for the third consecutive month in May (www.tuik.gov.tr, June 10). Although the improvement is attributed largely to the AKP government’s economic stimulus packages, it remains uncertain whether domestic demand alone can sustain economic development.

Starting in the second half of 2008, the Turkish economy felt the impact of the global financial crisis: industrial production output, exports, economic growth and industrial capacity utilization rates dropped dramatically, while unemployment soared (EDM, February 18). In January and February, the industrial capacity utilization rate dropped to 63.8 percent and hit a record low in the last two decades, presenting the starkest evidence of the contraction within the Turkish economy. In an attempt to prevent a deeper recession, the Central Bank gradually cut its interest rates. In addition, the AKP government, which was under fire for failing to take effective precautions, adopted several economic packages. In March, temporary tax cuts were introduced in major sectors including automotive, housing and household appliances in order to stimulate domestic demand (EDM, March 16).

Recent economic trends indicate that these precautions slowed the pace of the downturn. In March, the capacity utilization rate increased for the first time since September 2008 and has continued to climb; it moved from 63.8 percent in February to 64.7 in March, and to 66.8 in April and 70.4 percent in May.

While confirming this trend, TurkStat’s report highlighted low domestic and foreign demand as the major factors negatively affecting the capacity utilization. Although in May the capacity utilization rate indicated a 12 percent decline compared to the previous year, demonstrating the extent of the economic downturn, the report provided other signs of recovery. The production volume in May increased by 7.6 percent compared to April, which is estimated to continue growing by 6.7 percent in June. The sales volume increased by 6.4 percent in May and this is forecast to continue in June (www.tuik.gov.tr, June 10).

The recent figures were interpreted by government officials as a sign that Turkey might be able to mitigate the full impact of the crisis. The Minister of Trade and Industry Nihat Ergun attributed the growth in the capacity utilization to the production triggered by the government’s earlier economic packages. He argued that a slow recovery was now under way. Nonetheless, he avoided drawing an overly optimistic picture, and added that without the complementary expansion in foreign demand, the recovery might be short-lived (www.cnnturk.com, June 10).

Indeed, following the introduction of the latest economic package, several companies that were considering halting their production dropped these plans. Likewise, many companies that had applied for the government sponsored short term pay compensation, in order not to lay off their employees stopped receiving those benefits and began paying full salaries (Zaman, April 13). Moreover, a report published by an Ankara-based think-tank found that a majority of the automotive sales were financed by consumer savings and seller credits, rather than bank loans. The report suggested that this might prove an important indicator, signaling the growing consumer confidence in the market -a key factor for economic recovery (www.tepav.org.tr, June 4).

The stimulus package has provided temporary relief, but it is uncertain what will occur after the tax incentives expire this month. Since the global economy is unlikely to recover in the short term, foreign demand cannot serve as the main stimulant for the Turkish economy. Therefore, the key question might be whether Turkey’s domestic demand can sustain its economic growth. Some experts maintain that with improved economic coordination and more intensive public involvement in the functioning of the economy, Turkey can stimulate domestic demand and maintain its economic growth (www.tepav.org.tr, May 27). However, other analysts expect that, short of any major surge in foreign demand, it will be difficult to sustain such economic growth in the second half of 2009. On the contrary, they forecast that the automotive sector is likely to face "renewed sharp contraction in the second half of 2009 and a slow recovery beyond that" (Hurriyet Daily News, May 29).

Since the automotive sector is one of the engines of Turkish economic development, the government needs to implement additional measures to redress the deficit caused by this contraction. With such considerations in mind, Prime Minister Recep Tayyip Erdogan announced the fifth economic incentives package on June 4. The package seeks to enhance the economy’s competitive power and eliminate regional discrepancies through region, sector and project specific incentives and investments. Businesses investing in poorer regions such as in eastern Turkey will be entitled to free land, tax breaks on corporate taxation, and government assistance for employees’ social security premiums, etc. An additional package aims to reduce unemployment by funding various seasonal public works, such as repairing schools and hospitals and planting trees, as well as providing vocational training. With this new package, the total cost of the stimulus packages for 2009 and 2010 is expected to reach 60 billion TL ($38.7 billion) (www.32gunhaber.com, June 4).

The government’s economic policy is driven by the need to reduce the impact of the crisis on households to prevent the erosion of its political popularity. In this context, it has elongated the negotiations with the IMF to sign a loan deal, which might have imposed tighter budgetary rules on public spending. Recent reports suggest that in response to the signs of recovery, the treasury has an alternative plan to continue the economic program without a stand-by agreement with the IMF (Referans, May 20). The government has managed to slow the downturn and escape a deep recession, but it is still too early to determine when the Turkish economy will experience a permanent recovery. Moreover, if the global crisis continues beyond 2009 the heavy financial burden of the stimulus packages on the budget might return to haunt the Turkish economy, and possibly damage the government’s popularity.