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    Central Asia
     Aug 25, 2009
Turkish recovery needs more time
By Saban Kardas

The June data on the Turkish industrial production, released by the Turkish Statistical Institute (TurkStat), give mixed signals concerning the influence of the economic crisis on the Turkish economy. The figures show that although industrial output is still down from last year's levels, industrial production is moving upward. The Turkish economy is no longer in free fall, but a permanent economic recovery might not materialize soon.

Industrial production dropped by 9.7% in June 2009 on a year-on-year basis, maintaining a continuous decline since the second half of 2008. After industrial production contracted by a record 23.8% in February, the decline in industrial output started to slow down in March, and this process has continued. As a sign of this partial recovery, in June the contraction rate dropped to single


digits for the first time since November 2008. Moreover, in June industrial output increased by 7.3% compared with May. This follows on the previous month, when industrial output increased by 0.8% compared with April.

According to the main industrial grouping's classification, the highest decline in June compared with the previous year was in capital goods, down by 29.7%. Production declined by 10.6% in manufacturing industry, 7.9% in mining, and 7% in energy.

Economists suggest that the slowing of the decline over four consecutive months and the rise in output on a month-on-month basis has bolstered expectations that the contraction might be bottoming out. Tanil Kucuk, chairman of the Istanbul Chamber of Industry, said that although 9.7% is a very high rate of decline under normal conditions, "looking at the economic situation for the past year, we consider this development the lesser of two evils and find it promising".

Experts believe that there is a visible upturn in the Turkish economy. Other economic figures also lend partial support to this optimistic outlook. Central bank data showed that the current account deficit dropped 65% in June on a year-on-year basis. In the first half of 2009, the current account deficit was also down 75.7% compared with the same period last year.

Turkey's foreign trade deficit is likely to decrease by the end of the year and could drop to $27.2 billion, according to the projections of TurkStat based on the figures from the first half of 2008. The foreign trade balance recorded a $69.8 billion deficit at the end of last year. The exponentially growing foreign account deficit and foreign trade deficit were major concerns for the Turkish economy prior to the global financial crisis. The slowdown brought about by the crisis had a positive effect by curbing Turkey's imports. Although exports also declined as a result of the shrinking global economy, the central bank estimates that Turkey's export volume will grow as the global economy starts to recover.

The improvement is attributed largely to the economic recovery plans which the government launched in the first half of the year. Through several stimulus packages, the government introduced temporary tax cuts on automobiles, home appliances and housing in order to generate domestic demand and reduce the impact of the crisis on the country. The effect of the economic packages in this recovery is evident, especially in household appliances production, where there is a clear increase. The production of durable consumer goods increased by 7.2% and perishable consumer goods increased by 1.8%. However, the production decline within the automotive sector has continued.

Nonetheless, experts estimate that the effect of the domestic demand generated by the stimulus packages might wane after August. Therefore, they expect the contraction in the economy to persist in the third quarter of 2009, and perhaps beyond. Though finding the recent figures promising, industrialists' representatives had expected more than "hope" and have called on the government to take additional precautions to get the country out of recession.

However, given the heavy costs of the previous packages on the treasury, the government is unlikely to pass a large-scale stimulus package. Due to public spending ahead of the March local elections and the declining state revenues as a result of the crisis, the budget deficit has already surpassed the estimates at the beginning of the year.

While the deficit is expected to reach 70 billion Turkish lira (US$47 billion) at the end of the year, the government is trying to keep it to about 60 billion lira. Toward this end, it has already raised some taxes and announced cuts in spending, including healthcare. Therefore, rather than introducing new packages to stimulate demand, the government is working on new measures to narrow the budget deficit. Although tax hikes and limitations on government spending might narrow the gap, they may also curb demand and negatively affect growth.

The Turkish economy may no longer be in free fall, but it is unclear how sustainable the recovery might prove. Since the effect of the domestic stimulus packages appears to be short-lived and the government is unlikely to initiate any new stimulus packages, the economy's sustainable recovery depends on external demand, and hence developments within the global economy.

Fortunately, the upward trend in the Turkish economy is accompanied by the recent news coming from the world markets. American, Chinese and other large economies have reported the positive effect of economic packages in preventing the deepening of the global recession. While signs of recovery have raised hopes that the global downturn might be coming to an end, it is too early to expect an expanding external demand to stimulate the Turkish economy. Therefore, it might take more time before Turkey can move out of the recession.

Saban Kardas is an associate instructor at the Political Science Department, University of Utah, USA.

(This article first appeared in The Jamestown Foundation. Used with permission.)

(Copyright 2009 The Jamestown Foundation.)

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