Why hasn’t GDP growth made Turks feel richer?

The head of one of Turkey’s most successful polling agencies said that unless Turkey’s economic condition improved, support for the governing Justice and Development Party (AKP) would fall below 40 percent at the upcoming local elections in 2019. 

Konsensus head Murat Sarı, in an interview, gave the warnings following the results of his company’s most recent poll, which showed that a whopping 65 percent rated 2017 as “bad”, and that 80 percent of respondents said they had economic difficulties.

Yet, the poll showed that 51 percent of the same group expected 2018 to be better. 

Sarı concluded that unless 2018 fulfilled economic expectations, the governing party would be punished for failing to meet them at the next elections in March 2019.   

But wait… Hasn’t the Turkish economy just posted 11 percent GDP growth in the third quarter 2017 and isn’t it set to reach an impressive 7 percent for the whole of 2017? How are 80 percent of the populace experiencing “economic difficulties” in an economy whose government has proudly announced a worldbeating growth rate?

Sarı is not alone in his observations, which will leave the government feeling distinctly uncomfortable.

Turkey experienced a similar situation at the March 2009 local elections, where the AKP vote dived to a low of 38.6 percent. This was seen as punishment for the government acting late in the wake of the global financial crisis that hit Turkey with double-digit GDP contraction in the first quarter of 2009.  Thereafter, with immense global liquidity flows helping out the government on the GDP front and pulling down consumer price inflation to a record low of single digits through a strong lira; it was able to increase its vote share to 46 percent in Turkey’s next round of local elections.  

Turkey GDP growth
Turkish CPI and core inflation

The comments from Konsensus are valuable, not only because it is a credible polling company, but also because it once again reminds us all about the curious case of the Turkish economy: Either there is something wrong with the growth figures or, despite hitting a record on a global scale, Turkey’s growth is not good enough for the Turkish people for some reason.   

Tackling growth would be an easy start. Experts on the mathematics of growth fiercely argue that recent GDP statistics are unreliable.

Turkey revised its official GDP series back in December 2016, boosting its economic performance quite significantly.  The revisions started from 2009 and onwards, with a structural disruption in the time series from the past.  Moreover, in an effort to meet EU norms, new calculation and data collection methods were also introduced. Following the revision, Turkey’s new GDP is 20 percent higher than the old series for 2015 and GDP growth from 2009–2015 is 1.8 percentage points higher per year than previously reported. The growth differentials from consumption and investment are eye-catching, with higher investment growth to a large degree driven by the construction sector. Other extraordinary figures include Turkey’s savings rate, which was revised up to 24.8 percent in 2015 with the new GDP series from the previous 15 percent.  

Prof. Erik Meyersson of the Stockholm School of Economics, in a well-known piece, has shown how the new GDP data sets appear out of sync with other key economic indicators.  He uses eight variables that have been good proxies for Turkey’s GDP growth between 2004–2009: the industrial production index, energy consumption, carbon dioxide emissions, freight, passenger traffic, bank loans and construction permits. His results show how Turkey’s GDP growth, as revealed by the new series, is strikingly higher than what the aforementioned variables indicate between 2010 and 2015. 

Veteran Turkish economist Korkut Boratav adds that instead of constructing GDP statistics from production surveys, the new GDP series relies on accounting and bureaucratic records by the Finance Ministry, the Interior Ministry, and the Banking Regulation and Supervisory Board (BDDK), such as tax returns. He also reminds us that employment statistics, which were directly related to the level and growth of GDP, now appear completely statistically detached. 

All these serious comments on Turkey’s new GDP calculation methodology put the 11 percent third quarter and an overall 7 percent GDP growth for 2017 into question. In this context, the Konsensus poll showing that 80 percent of the population is going through economic difficulties when Turkey’s economy is riding high on the “newly constructed series” may not seem so surprising.

With a ceteris paribus approach, let’s assume the GDP series are correct somehow and they do capture the changes in the Turkish economy following the 2001 meltdown in a better way. Still, an explanation for the Konsensus survey results is needed. Why would Turkish people feel economically strained when growth is soaring by double digits?

Could it be inflation?

It’s no secret that the Turkish administration has prioritised growth over meeting the inflation target of 5 percent. The past couple of years have seen monetary and fiscal policy that contradicts an inflation-targeting regime, letting loose inflation rates in Turkey. As of year-end 2017, consumer price inflation was at 12 percent and core inflation was at a similar level. 

It may be that growth becomes marginal for Turkish people who are tangibly stressed by their declining purchasing power as the inflation rate is persistently high, leading to deteriorating expectations.

Can this be a time for the AKP government to realise how serious the negative effects of high inflation in Turkey are? How high inflation nullifies the AKP’s efforts to bolster growth despite a very strong growth performance, if one is to believe the intactness of the GDP series? How pushing for ever-stronger growth rates remains marginal and creates inflation under the current circumstances?       

Turkish inflation expectations

To the extent the Konsensus research is correct, the upcoming local elections will surely settle a very hot topic of debate in Turkey. Can high growth by itself be the cure-all the AKP has been flagging? Or would it be better to seek low inflation that can be accompanied with perhaps a milder growth rate to make residents feel safer investing at home, spending, and planning for the future.

No doubt with the course of the economy always affecting election results, the AKP’s upcoming election performance will tell us a lot about the success of the administration’s governance of Turkey’s economy.     

Sources of Turkish growth