Summary: The latest data disclosures support our long-held view for a high growth rate for this year, while we also realize that the divergence between domestic and external demand has turned more visible. This outlook would unlikely change the monetary stance of the Central Bank, but ease the downside risks on the policy rates. The Bank is more likely to respond via instruments other than interest rate in case this divergence continues. Separately, the fresh budget figures seem to be relieving for the Bank, who emphasized that they would be monitoring the implementation at the absence of fiscal rule.
The data disclosures over the recent term suggest that divergence between growth rates of domestic and external demand has turned more apparent in Turkey. The Consumption Index reached all time high in August, posting around 20% y/y gains in each of the last two months, while the annual expansion in the domestic loans climbed above 35%. Meanwhile, the unemployment rate remained on a steep decline pattern and more importantly the seasonally adjusted rate receded to its lowest level since October 2008. Also, after the limited drop in May, the economy continued to generate jobs in June, as was valid in the m/m increase of 161K in the total payrolls (the average increase in the first five months was 100K). The consumption and investment contribitued above-expected 4.5 pp and 5.9 pp to the overall GDP growth in Q2. Despite this healthy domestic demand outlook, the industrial output has lost pace over the last months due to the slowdown in exports. The seasonally adjusted industrial output could only recoup by 0.3% m/m in June atop of the sharp 2.2% slump in June. Note also that the net exports erased some 1.6 pp off the GDP in Q2. Nevertheless, Q2 GDP came better than expected; posting a seasonally adjusted quarterly growth rate of 3.7% and GDP level has reached mildly above its pre-crisis peak. The fresh data disclosures such as the increase in current account deficit, improvement in labor market and budget performance, suggest a slightly better economic outlook. On the contrary, the leading indicators of economic activity indicate that economy would enter to a somewhat slower pace in the third quarter and display a flattish trend. Separately, as we approach to a period where the weak base effect would fade off, the Turkish economy is likely to post more conservative single-digit growth rates in the following quarters (we expect around 6% growth in Q3, followed by 4% in the following quarters). In other words, we stick to our baseline scenario that includes below-potential growth rate and slow recovery.
While the growth outlook is a bit stronger than what the market expected, we stick to our above-consensus GDP growth forecast of 7.0% for 2010. Note that the risks now are upside on this forecast. However, we reckon the growth rate would decelerate to 4.0% vicinity in 2011, due to the weak global backdrop, unfavorable base effect linked to this year’s strong performance and likely deterioration in confidence in the election year. Thus, the fresh data would unlikely change the monetary stance of the Central Bank, but ease the downside risks on the policy rates. Recall that in the August MPC meeting summary, the Bank mentioned the ‘Economic Contraction At Home’ scenario whereby global economic problems intensify and contribute to a contraction of domestic economic activity, consequently triggering a new easing cycle. Back then, the Bank had also said “If this [exacerbating pattern of the divergence between the pace of recovery in the domestic demand and external demand] pattern of growth coexists with rapid credit expansion and a deterioration in the current account balance, consequently leading to financial stability concerns, it would be necessary to utilize other policy instruments such as reserve requirement ratios and liquidity tools more effectively.” In this context, the Bank introduced the technical rate cut in September MPC meeting, while also noting that it would be appropriate to proceed with the other measures outlined in the exit strategy. We expect soon there will be increase in F/X and TRY reserve requirements and anticipate the Bank resuming rate hikes by May next year reaching 200 bps in end-2011.
On the other hand, the Central Bank frequently signals that they keep a close eye on the fiscal policies while forming their monetary policy strategy. Recalling from the August meeting summary, the Bank had noted that “…the delay in the enactment of the fiscal rule has increased the importance of current fiscal policy implementation.” In that context, the July-August budget realizations that were disclosed a month later than normal timing due to fiscal holiday would probably give some relief to the Bank. The Bank’s assessment regarding the 1H performance was positive and the Bank had said “… the better-than-expected performance in budget revenues, due to stronger economic activity than envisaged in the Medium Term Program (MTP), is largely being used to reduce government debt,” signaling that they do not see any problem with the fiscal discipline. We think that July-August budget performance is likely to deserve a similar assessment.
Having a closer look at the fiscal outlook, the central government budget produced TRY8.8bn primary surplus in July-August period, much better than the TRY5.1bn surplus in the look-alike slice of last year. There is substantial improvement in revenues on the back of strong tax proceeds that is more than enough to counterbalance the increase in primary expenditures, while around TRY2.0bn transfers from unemployment insurance fund and privatization revenues also helped the revenue performance. Adding the visible decline in interest payments, the budget balance improved at an even greater pace as the two-month budget produced a surplus of TRY1.0bn vs. last year’s TRY8.1bn deficit. All in all, the 12-month central government budget deficit to GDP declined to 3.4% vs. the year-end target of 4.9% in the Medium Term Program (MTP). This improvement is in line with our estimates disclosed in the ‘Fiscal Outlook’ report published on Monday. This may indicate that there is an extra room for 1.5 pp more (TRY15.8bn) for expenditures boosting or revenue-damping policies. In other words, extra improvement in July-August budget implies that the fiscal area that can be turned into higher expenditures is enlarged and both Finance Minister Simsek’s words that “we will be loyal to our targets” and Economy Minister Babacan’s emphasis that the year-end budget deficit will be in line with MTP targets are consistent with deterioration vs. the current point. Along with the Central Bank, we will continue to monitor how this fiscal area will be used in the following period. However, even if budget performance deteriorates somewhat in the period ahead, we do not anticipate the Bank would react unless this deterioration yields upward pressure on inflation via for example indirect tax hikes.
20 Eylül 2010 Pazartesi
6 Eylül 2010 Pazartesi
Global Real-ISM…
The Purchasing Managers Index (PMI) that is disclosed in the first day of every month and is followed as the most important leading indicator for economic activity showed that the World economy remained in a weakening trend in August. The Global PMI that is the average of the country PMIs across the World took the value of 53.8 and held above the 50 threshold that demarcates the expansion and contraction periods. Nevertheless, this was the lowest print over the last 1 year. Contrary to the surprising jump in the U.S., the index in China (51.7) and Japan (50.1), which are the engines of global growth, dropped below this average. No doubt, the growth implication of a PMI that is slightly above the threshold would not be the same for developing countries, with high potential growth rate like China, and developed countries. However, what is certain is that in both country groups the PMI levels imply a near potential at best and most probably a weaker growth rate. In due course, the downtrend in the leading indicators also suggests that the most robust phase of the post-recession recovery has been over. Obviously, the extent that the countries could benefit from this fast rebound period differed depending on the initial shape of the economy prior to the recession. The countries which performed poorly in that respect would also be most vulnerable to a new slowdown cycle. Glancing at home, the leading indicators (Real Sector Confidence Index (RCSI), Turkish PMI and Central Bank Composite Leading Indicator) indicate that Turkey stands at a similar point in terms of the economic cycle. Tracking the global trends, the PMI and RSCI started to fall after peaking in April-May period, hinting that the robust growth performance in H1 would not be extended into H2. Meanwhile, the Central Bank’s Composite Leading Indicator signaled for the turning point of the industrial production two-three months ahead, as usual and the annual expansion of the industrial output eased to around 3% from around 10% after that point. This is a very weak recovery pace and let alone narrowing, the output gap would widen further in these circumstances.
Now, the question is whether this is an irreversible trend? How does the Central Bank perceive these developments and what are the measures they plan? We will be seeking answers to these questions in this weekly.
In order to have a better view of the picture above, the economy needs to be cleared from last year’s weak base effect. In essence it seems that the weak economic outlook that is described above may be undermined due to a number of reasons. For instance we expect 9.2% annual GDP growth in Q2 and 9.5% annual expansion in July industrial output both due to be released in the following weeks. Moreover, the domestic demand depicts a relatively better picture, thanks to the support from monetary policy. What then is going to be our benchmark? The rate of growth in the consecutive periods… A slowdown in GDP to 5-6% in Q3 and to 3-4% in Q4 would be acceptable, while growth rates below these intervals would be alarming.
The Central Banks are always concerned with the growth-inflation balance, while growth outlook outweighs in their monetary policy response function during crisis periods. The CBRT adopted countercyclical monetary policy strategy during and post recession period as much as the inflation outlook allowed them to do so. The Bank still sticks to this approach, as implied by the latest MPC meeting summary. Recall that in April the Bank had announced an exit strategy and pointed at Q4 this year as the start of the rate hikes, while coming to July, the risks associated with the global economy and the accompanying slowdown in the domestic economic activity urged the Bank to postpone rate hikes to an uncertain date next year, together with a delay in the exit strategy towards the end of this year. The Bank’s rhetoric seems to have changed a little bit since then as well. Among the alternative scenarios to the baseline described in the July Inflation Report, the Bank picked the one that we name as “economic contraction at home” and emphasized it in the latest MPC meeting summary. This has given the impression that they may be closer to this scenario than other alternatives (Pls. see below the Box for Central Bank Scenarios). In this scenario the Bank says should problems in the global economy further intensify, thereby increasing the possibility of a domestic recession, a new easing cycle may be considered. Even though in the meeting summary the Bank hints that they stick to the baseline scenario by saying that the outlook is in line with the July Inflation Report, the Bank only underlined the “economic contraction at home” scenario, without mentioning of “delayed recovery at home” scenario. This may be a sign that the alternative scenario that assumes first rate hike through the end of 2011 is now the Bank’s baseline scenario.
Against this backdrop, the Central Bank underlines that there is no change in the presumed timing of the steps in exit strategy (gradual increase in the TRY-FX reserve requirement rate and technical rate cut), which are planned to be introduced this year. Nevertheless, the Bank leaves the door open to different cases, mentioning of the risks that would either cause those steps to be brought forward or delayed. For instance, in the “economic contraction at home” scenario, the exit strategy was assumed to be delayed. Therefore, if this scenario is to be priced, that should consider both rate cuts and not implementing exit strategy. Needless to say, the above conclusions do depend on the domestic and foreign data disclosures more than ever.
In summary, the global economy remains in a slowdown trend, making it clearer that the strongest phase of recovery has been left behind. However, the uncertainties regarding the pace of recovery feed into double dip fears. Despite the support from monetary policy in Turkey, there is a significant deceleration in industrial output, while the leading indicators suggest deepening of this slowdown going forward. It is relieving to see that the Bank would keep the countercyclical monetary policy to combat this threat, which is not fully acknowledged by public opinion yet.
Central Bank Scenarios
Baseline: No important change in the recovery pace of economic activity is foreseen, with limited rate hikes starting sometime in 2011.
Delayed Recovery At Home: Should the global economy face a longer-than-anticipated period of anemic growth, which would consequently delay the domestic recovery significantly, the monetary tightening envisaged in 2011 under the baseline scenario may be postponed towards the end of 2011.
Economic Contraction At Home: An outcome whereby global economic problems intensify and contribute to a contraction of domestic economic activity may trigger a new easing cycle.
Faster Global Recovery: Monetary tightening may be implemented in an earlier period during 2011, should the recovery in economic activity turns out to be faster than expected.
Now, the question is whether this is an irreversible trend? How does the Central Bank perceive these developments and what are the measures they plan? We will be seeking answers to these questions in this weekly.
In order to have a better view of the picture above, the economy needs to be cleared from last year’s weak base effect. In essence it seems that the weak economic outlook that is described above may be undermined due to a number of reasons. For instance we expect 9.2% annual GDP growth in Q2 and 9.5% annual expansion in July industrial output both due to be released in the following weeks. Moreover, the domestic demand depicts a relatively better picture, thanks to the support from monetary policy. What then is going to be our benchmark? The rate of growth in the consecutive periods… A slowdown in GDP to 5-6% in Q3 and to 3-4% in Q4 would be acceptable, while growth rates below these intervals would be alarming.
The Central Banks are always concerned with the growth-inflation balance, while growth outlook outweighs in their monetary policy response function during crisis periods. The CBRT adopted countercyclical monetary policy strategy during and post recession period as much as the inflation outlook allowed them to do so. The Bank still sticks to this approach, as implied by the latest MPC meeting summary. Recall that in April the Bank had announced an exit strategy and pointed at Q4 this year as the start of the rate hikes, while coming to July, the risks associated with the global economy and the accompanying slowdown in the domestic economic activity urged the Bank to postpone rate hikes to an uncertain date next year, together with a delay in the exit strategy towards the end of this year. The Bank’s rhetoric seems to have changed a little bit since then as well. Among the alternative scenarios to the baseline described in the July Inflation Report, the Bank picked the one that we name as “economic contraction at home” and emphasized it in the latest MPC meeting summary. This has given the impression that they may be closer to this scenario than other alternatives (Pls. see below the Box for Central Bank Scenarios). In this scenario the Bank says should problems in the global economy further intensify, thereby increasing the possibility of a domestic recession, a new easing cycle may be considered. Even though in the meeting summary the Bank hints that they stick to the baseline scenario by saying that the outlook is in line with the July Inflation Report, the Bank only underlined the “economic contraction at home” scenario, without mentioning of “delayed recovery at home” scenario. This may be a sign that the alternative scenario that assumes first rate hike through the end of 2011 is now the Bank’s baseline scenario.
Against this backdrop, the Central Bank underlines that there is no change in the presumed timing of the steps in exit strategy (gradual increase in the TRY-FX reserve requirement rate and technical rate cut), which are planned to be introduced this year. Nevertheless, the Bank leaves the door open to different cases, mentioning of the risks that would either cause those steps to be brought forward or delayed. For instance, in the “economic contraction at home” scenario, the exit strategy was assumed to be delayed. Therefore, if this scenario is to be priced, that should consider both rate cuts and not implementing exit strategy. Needless to say, the above conclusions do depend on the domestic and foreign data disclosures more than ever.
In summary, the global economy remains in a slowdown trend, making it clearer that the strongest phase of recovery has been left behind. However, the uncertainties regarding the pace of recovery feed into double dip fears. Despite the support from monetary policy in Turkey, there is a significant deceleration in industrial output, while the leading indicators suggest deepening of this slowdown going forward. It is relieving to see that the Bank would keep the countercyclical monetary policy to combat this threat, which is not fully acknowledged by public opinion yet.
Central Bank Scenarios
Baseline: No important change in the recovery pace of economic activity is foreseen, with limited rate hikes starting sometime in 2011.
Delayed Recovery At Home: Should the global economy face a longer-than-anticipated period of anemic growth, which would consequently delay the domestic recovery significantly, the monetary tightening envisaged in 2011 under the baseline scenario may be postponed towards the end of 2011.
Economic Contraction At Home: An outcome whereby global economic problems intensify and contribute to a contraction of domestic economic activity may trigger a new easing cycle.
Faster Global Recovery: Monetary tightening may be implemented in an earlier period during 2011, should the recovery in economic activity turns out to be faster than expected.
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