Tuesday, September 02, 2003

Turkey's Rapidly Growing Economy

Much as we try, we can't always sparkle. Today Stephen Roach has a pretty boring piece about globalisation. I say pretty boring because I think right now he's run out of things to say. The reason is obvious: as he says he's a card carrying skeptic, so he has now to wait and see. The piece on globalisation is only a re-run of things he has said before, and not all of them are 'state of the art'. This is where being a blogger is a definite advantage, as while you are waiting you can entertain yourself - and others - with something completely different. Anyway I'm not a card carrying anything, let alone a skeptic! I just want to understand what is happening. If things are going in a direction I don't expect, then this isn't a problem, it is interesting. It just means you have to change the theory a bit, that's all. Meantime Morgan Stanley do have an interesting piece on Turkey. Turkey, as the article says "seems to us en route to becoming one of the fastest-growing economies in the world" just what my demographic thesis would predict. No need to make too many changes yet!

The Turkish economy is on a rebound, we believe, but without creating any jobs. Real gross domestic product expanded by 8.0% year on year in the first quarter of this year, which implies a seasonally adjusted annualised growth rate of 12.2%, according to our computations. Turkey seems to us en route to becoming one of the fastest-growing economies in the world. Nevertheless, a recovery in general economic activity does not necessarily mean an immediate healing in the labour market. In fact, the current business cycle has turned into a jobless recovery. The unemployment rate climbed to a peak of 12.3% of the civilian labour force in the first quarter, from 5.6% in 2000. Since the beginning of economic troubles in the fourth quarter of 2000, over 2.5 million jobs have been lost in Turkey, and the output recovery has so far failed to bring new opportunities to the labour market.

The divergence between output and jobs is bad news for income growth and public finances. Demographic shifts and the state of the labour market were critical factors in determining the outcome in the November 2002 elections, and improving the outlook for millions of job seekers is still a daunting task for the ruling government. The unemployment rate may have dropped over two percentage points to 10% in the second quarter, but mostly because more people quit looking for work and dropped out of the labour force, in our view. The participation rate declined to an average of 48.5% in the first half of this year, from 51.4% in the second half of 2002. In fact, the jobless rate excluding the agriculture sector rose from 8.2% before the crisis to 15.1% in 2002 and improved marginally to 14.6% this year.

The current state of the labour market is especially devastating for the young and educated. The unemployment rate has risen across the board, but those aged 15-24 with above-high-school education endured the sharpest rise in unemployment over the last two years. The unemployment rate for the young and educated increased from 20.3% before the crisis to a peak of 31.1% in the third quarter of 2002. Although it decelerated to 25.6% in the second quarter of this year, Turkey’s young population continues to suffer more than other segments of the labour market. For example, the jobless rate for urban youths with qualifications stands at a disturbing rate of 28.1% -- almost three times the average unemployment rate.............

Sustainable economic revival and job creation need a further drop in real interest rates. With an average age of 26, the Turkish economy needs to become a dynamic job machine. Contrary to conventional political opinion, we think the economic stabilisation programme is not contractionary at all. Supported by structural reforms, fiscal tightening would reduce the public-sector borrowing requirement on a sustainable basis. In return, the declining real interest rate reduces the crowding-out effect and encourages private investment. In fact, the most important reason for disappointing job creation has been the lack of private investment, which contracted by 34.9% in 2001 and 7.2% last year. Though we project an annual growth rate of 15.2% in private fixed investment this year, gross fixed investment (including the public sector) would still be lagging behind the real GDP growth rate, which has so far been driven mainly by an unusual inventory accumulation...........

The excess supply in the labour market eradicates the risk of overheating of the economy, in our opinion. Every cloud has a silver lining, and the excess supply in the labour market has made a significant contribution to the disinflation process. The consumer price index posted an annual increase of 27.4% in July, down from a peak of 73.2% at the beginning of 2002. According to our calculations, the seasonally adjusted annualised inflation rate declined to 17.0% in July, from 30.8% in May. We observed an even more marked deceleration in the annualised “core” inflation, which plunged to 13.8% in July from a peak of 28.8% in April. In our opinion, besides real currency appreciation and tight monetary conditions, a limited recovery in the cumulative output gap eliminates “pipeline” inflation pressures in the short run. This is why we project a year-end inflation rate of 19.2%, along with an accelerating growth prognosis.
Source: Morgan Stanley Global Economic Forum

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