China and Turkey suffer from same growth malaise

EMRE DELİVELİ

By looking at the latest leading indicators on growth, it would be hard to argue that China and Turkey are suffering from the same growth problem.

HSBC’s Purchasing Managers’ Index (PMI) for China, a composite indicator designed to provide a single-figure snapshot of operating conditions in manufacturing, reached an 18-month high in July. In contrast, the Turkish PMI, which was also released on Aug. 1, hit a 63-month low.

The two countries’ near-term growth outlooks are also different: The Chinese government accepted the markets’ bearish view on the Chinese economy in March by adopting a series of stimulus measures. As a result, instead of falling from the first quarter’s 7.4 percent, growth rose to 7.5 percent in the second quarter. It is on track to attain the government’s target of “around 7.5 percent.”

The Turkish economy started the year strong. Annual growth had been hovering in the 4.3-4.5 percent range since the second quarter of 2013, and at 4.3 percent, first quarter growth managed to keep that trend. However, leading indicators have been weakening since then, and Turkey will probably not attain the government’s 4 percent target for this year, despite the loose monetary and fiscal policy.

Notwithstanding these differences, both countries are on unsustainable growth paths. Turkey has been relying on external financing and consumption for growth and it is not clear how it could grow enough to raise living standards and keep unemployment at bay in the absence of capital flows. China has been depending too much on investment and credit and too little on consumption, with the real estate sector in the middle of a web of rising vulnerabilities, as I explained in my last column.

Turkey needs to increase its savings rate and shift its economy from consumption to exports. China, on the other hand, needs to move away from investment toward consumption, which would mean a fall in the savings rate. But both countries need structural reforms for sustainable growth.

I am not sure which country has it easier: China already announced a comprehensive reform blueprint last year. The IMF argues in its latest report on the Chinese economy, which was released on July 31, that its successful implementation would help economic rebalancing. The question is whether officials would be willing to accept a slower, but safer growth path during this transition.

Turkey will automatically end up with lower growth once capital flows to emerging markets subside. Although the government has not been eager to implement reforms until now, they may change their mind when the sh*t hits the fan. Chinese policymakers, on the other hand, may be affected by the maxim, “if it ain’t broke, don’t fix it”, allowing the vulnerabilities to rise.

Politics may make a difference. The Chinese government does not have to worry about elections, whereas Supreme Leader Recep Tayyip Erdoğan will want to get enough votes in the 2015 general elections to be able to change the Constitution – so that he can increase the powers of the presidency and legalize his rule.

Pork-barrel spending and more pressure on the Central Bank to lower rates are more likely than reforms with that agenda. Chinese officials, on the other hand, have always shown the resolve to act when need be.