Last week's economic agenda was dominated by the debate on whether Turkish Finance Minister Mehmet Şimşek's seat was secure or not. The economic administration held meetings with representatives of various capital groups, some of whom were even received by President Recep Tayyip Erdoğan.
Although the objections of capital groups other than the established big capital groups to Şimşek's program have not yet been voiced publicly and loudly, the deterioration in critical indicators such as firm bankruptcies and unemployment will make these voices more audible. Therefore, the debate on Şimşek’s seat is closed for now to be reopened in the future.
This week's economic agenda was dominated by important data releases. In this column, I wrote about how Şimşek’s program destroyed the productive capacity of the economy through growth and inflation data.
The economy is slowing down
When we examine the economic growth data, we see that the economy grew by 2.5 percent annually in the second quarter. This is well below the historical averages of the Turkish economy. When we look at the data not on an annual basis, but on a quarter-on-quarter basis, we see that this time the economy did not slow down, but stagnated, growing by 0.1 percent.
Looking at the components of growth, we see that household consumption contracted sharply. This can be seen as a reflection of the impoverishment we are experiencing. In the second quarter, public expenditures and fixed capital formation almost came to a halt. Let us dwell on the foreign trade data a little more.
In his statement on the latest data, Mehmet Şimşek declared that the process of 'rebalancing in growth' has begun. What he means is that growth should not be based solely on domestic demand or external demand, and that the contribution of the two types of demand to growth should be balanced. This may, of course, be preferable, since such a balanced growth path can be expected to reduce the current account deficit and dependence on capital inflows. However, equalization of poverty is not what is desired. Şimşek is wrong if he expects us to be happy that 1.2 percent of the 2.5 percent growth came from domestic demand and 1.3 percent from external demand. This is a growth that impoverishes and equalizes poverty.
Finally, let us turn to the positive contribution of net exports to growth. Two points are important. The first is that this result is not due to an increase in exports but to a decline in imports. Worse, the decline in imports is not due to the decline in imports of consumption goods, but the decline in imports of intermediate goods.
For the second point: Since production is dependent on imports of intermediate goods as a result of the current production structure in Turkey, a decline in imports, especially a decline in imports of intermediate goods, results in the destruction of the productive structure and is a sign of an economic crisis.
The industry is shrinking
Other data on the destruction of the productive structure came from the industry. According to the second quarter data, the industrial sector is contracting. We know that Şimşek’s program is a stabilization program. It has no projections for the future of the economy. The typical characteristic of such stabilization programs is that they destroy the productive capacity of the economy. In addition to the contraction in industry, the course of investments clearly shows us this development.
Machinery and equipment investments started to contract in the economic crisis that followed the interest rate hikes in 2018, but then achieved a strong growth pace during the Covid-19 pandemic and especially with the effect of interest rate cuts in 2021. However, the latest data shows that machinery and equipment investments contracted by 5.6 percent annually.
This shows that the productive capacity of the economy will shrink in the coming period. Reduced investment may help reduce inflation in the short run, but the erosion of productive capacity is inflationary in the long run. Therefore, Şimşek’s program seeks to save the day at the expense of sacrificing the future.
Base effect
Inflation fell to 51.97 percent last month. This was largely the result of the bounce back of inflation caused by the Şimşek administration. In the summer of last year, there were very high monthly price increases due to the high devaluation of the Turkish lira and additional taxes. When 12 months pass, inflation falls as a result of these months being removed from the series.
In addition to the base effect, the economic slowdown also played a role in the decline in inflation. However, the way in which inflation is brought down by stalling the economy, and the way in which the cost of this is passed on to workers, shows the impoverishing aspects of the Şimşek program and the destruction of the productive structure of the economy.
Narrowed path
In the period ahead, we will see the path ahead of Şimşek’s program narrowing further. The economy will slow down further in the second half of 2024. In fact, if we are to trust the Central Bank projections, an economic crisis awaits us in the coming months. This will lead to further destruction of productive capacity and increases in unemployment. The new Medium Term Program, which will be announced this week, will contain clues to this course. I will discuss these next week.