False signs of green shoots in Turkish data

It was quite warm in Marmaris during the week. Just as I was thinking spring had finally come, the weather took a turn for the worse. There are similar signs of false green shoots in Turkish data.

At first look, last week’s economic figures give plenty of reason to celebrate. Firms are producing, and consumers getting ready to buy again, while the current account deficit is falling. But the devil is in the details, and the details definitely do not paint a rosy picture.



At 7.2 percent, the annual rise in industrial production turned out to be much higher than expectations of 4.4 percent in January. Intermediate and capital goods production, which are important leading indicators of investment, were particularly strong.



A more detailed look reveals that the growth in industrial production was driven by export-oriented sectors. According to preliminary data from Turkish Exporters Association, exports rose only 4.3 percent annually in February, so I don’t expect them to contribute as much to industrial production that month.



On the other hand, the slowdown in domestic demand was visible in durable goods production, which rose only 2.8 percent annually. How about the sharp rise in consumer confidence? Turkish business channel CNBC-e’s preliminary index did indeed increase 7 points in March after falling in the previous 3 months.



However, the surge in the headline figure is almost entirely from the forward-looking questions of the survey used to compile the index. While the consumer expectation sub-index, which is made up of those questions, surged, the consumer sentiment sub-index, which measures the appetite to buy durable goods, barely moved from its all-time low in February. 

All in all, both industrial production and consumer confidence hint that domestic demand is weak. Investment is still resisting, probably thanks to exports, but the weakness in consumption is likely to drag it down eventually.

You should actually expect exports to be strong, thanks to the weak lira. As I explained in my Mar. 3 column, economic theory predicts that a weak local currency will eventually improve a country’s trade balance. Therefore, the improvement in the current account deficit in January should not be too surprising.



However, I also argued in that column that the improvement will not be as marked as many Turkey analysts are expecting it to be. Turkey imports too much energy, its export-oriented sectors are not very competitive, and its exporters import a lot of inputs they cannot obtain domestically.

Moreover, the decrease in the deficit caused many to brush aside the danger signs in its financing: 12-month rolling capital inflows declined to $58.8 from US$71.5 billion a month ago. Most of these flows continue to be short-term.



My lungs are congested today (Sunday) after I went out with a t-shirt on Saturday, deceived by the nice weather earlier in the week. Don’t let the Turkish data do the same to you, and please #RememberBerkin!