Let me start with a textbook definition of economic growth:
“Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time.”
Let’s make that definition simpler: when the price changes are accounted for, growth reflects the extra value that an economy has created. That extra value may come from variety of channels and sectors, if an economy is well-diversified. For instance, if country X has a developing industrial sector that has shown great signs of enlargement, that expansion will feed the growth rates, and same situation applies to all other sectors. If country Y’s economy is not diversified enough, it will be depending on a particular sector. I really don’t want to bore you through a pile of textbook definitions and models, so I will only stick to that explanation for now.
In the last quarter, Turkish economy reported a surprising %4.5 quarterly growth rate (according to OECD), year-on-year basis. In spite of accelerating inflation, high and still rising unemployment rates, depreciating national currency and weakened international investment position (as can be seen in TCMB Reports), achieving some %4.5 quarterly growth seemed like a triumph. Statistically speaking, only China (%6.9), India (%6.2), Indonesia (%5), Iceland (%7.6) and Slovenia (%5) performed better than Turkey in the world economy. Still seems like a triumph, right? What else you can hope for? Your macroeconomic indicators are plunged, but you can still achieve %5 quarterly growth.
But how exactly?
Erwin Schrödinger is an Austrian physicist, a nobel laurate, if you have not heard of him already. His fame mainly comes from his objection of the Copenhagen Interpretation (for a detailed description, this link may come handy.), and his argument that an object in a physical system can’t exist in all possible configurations. For the cause of explaining his point, Schrödinger wanted people to imagine a closed box that contains a very small piece of radioactive material, a geiger counter, a hammer and a cat. He also wanted the people to imagine a system that if geiger counter detects the radioactive material, the hammer smashes on the cat. But since the material is very small hence very hard to detect, say, %20 chance to get detected, it is very hard to forecast the outcome. The only way to observe the outcome is opening the box. However, the Copenhagen interpretation argues that observing the system also forces the system to fall apart and mentioned physical object gets forced in one of the possible states. That’s where Schrödinger made his famous observation: the cat can’t be both dead and alive. To learn if the cat is dead or alive, you have to open the box and see that by yourself.
The recent status of the Turkish economy is similar. When you try to examine the recent picture, factors and the channels I have mentioned before should be telling you something: this kind of growth figure is clearly “unexpected”. By declaring that figure, Turkey seemed like beating many odds at once. Major policymaking institutions’ forecasts turned out wrong, global and regional markets were surprised. Unfortunately, that good mood lasted until somebody decided to open “the box”.
Eventually, -at least from now on- we all know that the cat can’t be both dead and alive.
The impulse behind Turkey’s Q1 rate was the expansionary government spending. In the first quarter of 2017, government consumption expenditure is increased by 9 points, reaching to %24-of-GDP from %15-of-GDP. In addition to that, Treasury declared primary budget deficit which is quite uncommon if you think about fiscal policy goals of Turkey. With Treasury Cash Balance currently standing at -12.6 billion TL and January-to-June treasury cash deficit is 33 billion TL, it is fairly easy to see that government is rapidly expanding its spending cap. The government is implementing that expansion to keep the goods and services markets hot; in other words, create a stable and ever-increasing level of public consumption. Turning up the expectations in the goods and services markets is crucial, because the deterioration in real economy has started being observable. Even if that kind of a move would translate into an increase in inflation rate, the policymakers took the shot. In fact, they were right in some aspects: the inflation rate was going to increase eventually because of the currency depreciation and market restructuring. Hence borrowing now and stimulating final consumption right afterwards seemed rather riskless because in the upcoming period, the real values of treasury’s deficit and public debt will be smaller, in addition to creating the targeted level of consumption increase. That move actually turned out pretty accurate, it resulted in nearly %8 increase in non-durable goods consumption and %5.5 increase in services consumption. Total household consumption increased by %5.2 when compared to same quarter of 2016. And these increases resulted in creating %1.1 quarterly economic growth rate just by themselves. Even the currency depreciation stopped for a while because of the surprising growth rate that came after that expansionary move.
Until some people decided to open the box to see if the cat is really alive.
Altering the expectations of the domestic markets is one thing, and it usually can be achieved rather easily. It can energize your domestic economy and change your domestic economic agents’ behavioral patterns -not just consumption patterns. However, international markets and global policymaking institutions and watchdogs are not so easy to deceive. They usually know something is wrong when you grow %5 overall but your investments increase only by %2. They usually observe that your short-term (1-year) capital resource need increases quarter by quarter since 2010, even though you record some %5 quarterly growth.
And that’s when you change expectations for good.
It is not an indigenous case of Turkey. All countries that have been depending solely on fiscal stimulus that aims to keep expectations stable will eventually pay the price of pushing the economical dynamics of their country so hard and will see the effects of short-termist policymaking. Creating a solid %5 figure is not the point, it won’t ever be the point. The real point is, making the “channels” of your economy work. I’m not just talking about the physical infrastructure here, I’m also mentioning the economical infrastructure of a country. Expectations of singular agents can change drastically when those channels do not work, and that is a point which you can not spend your way out of it.
Therefore, the policymakers are not “changing” or “altering” the expectations -both domestically and internationally-, they are deteriorating them. When international economic agents recognize that your growth is “Schrödinger’s Growth”, there is no point of grudging with it anymore. On the inside, when domestic economic agents realize that -surely later than international markets and agents- it’s “Schrödinger’s Growth” (and they usually realize those kind of facts during the choke points of the economy) their economical behavior patterns will be collapsed. Restructuring those patterns is whole another process which the world economy have been living through since 2008 crisis.