Latest GDP data shows even ‘middle income trap’ out of reach for Turkey

Turkey’s economy is still reeling from the effects of a currency crisis that peaked in August 2018 due to a spat with the United States, and the latest official figures show income falling to a level unseen since over a decade ago.

Negative growth and economic contraction have continued unabated for the last nine months. Per capita GDP has fallen below its 2007 level in - $9,656 – to just $8,811, according to figures from the state Turkish Statistical Institute (TÜİK).

Treasury and Finance Minister Berat Albayrak has announced a series of economic programmes since he came to office in July last year, but TÜİK’s figures show they have utterly failed.

The government’s promises to balance the economy have in fact taken Turkey’s economy 12 years backward, and poverty has risen.

When TÜİK announced its GDP growth rate for the second quarter of 2019, some said there was reason to believe the institute’s chairman, Yinal Yağan, had been padding the numbers. Nevertheless, TÜİK reported that GDP shrank by 1.5 percent for the second quarter of this year compared to the same period last year.

The institute said the economy had grown by 1.2 percent compared to the last quarter. But it is necessary to closely examine the figures to explain how this growth came about.

While the agricultural sector grew by 3.4 percent, the industrial and construction sectors contracted by 2.7 percent and 12.7 percent respectively.

The contribution to GDP from the service sector, which accounts for 52 percent of employment, also decreased by 0.3 percent.

Household consumer spending fell by 1.1 percent compared to last year, while government consumption expenditure rose by 3.3 percent.

Investment has also been shrinking at an increasing pace, in particular investment in industry. In the last four quarters, it has shrunk by 1.3 percent, 3.5 percent, 3.7 percent and 7.1 percent respectively.

So, the biggest contributor to growth has come from state expenditure, while investment capital has fallen by 22.8 percent, signalling darker times ahead.

Goods and service exports have risen by 8.1 percent, but this has been accompanied by a 16.9 percent decrease in goods and services imports, a sign of falling demand for intermediate goods as Turkey’s manufacturing sector shrinks.

As the negative growth reported in the second quarter of this year shows, the economy as a whole has been shrinking for the past nine months in a row.

Meanwhile, the 23 percent drop in investment and the 1.1 percent decrease in household consumer spending show that it was only state expenditure and imports that held the contraction to 1.5 percent in the last quarter.

Government spending has been financed by using central bank reserves and taking out debt – methods that are unsustainable in the long-term.

This is confirmed by sharply falling tax revenues and by the budget deficit, which has risen to unprecedented levels, exceeding 8 billion liras ($1.4 billion) in seven months in contravention of credit limit laws.

The fall in per capita GDP to $8,811 is another sign of serious trouble, indicating a serious decline in living standards and increasing poverty.

Turkey passed the $10,000 mark in 2008-2009, despite the global economic crisis, and for a long time after income levelled off around this amount, analysts described the country as being held down by the theoretical “middle income trap” that makes it difficult for countries to exceed a certain level of affluence.

When the ruling Justice and Development Party (AKP) came to power in 2002, per capita GDP was at $5,556. It rose to $9,656 in 2007, brought it to $10,931 the next year, and income peaked in 2013 at $12,480.

The failed coup attempt in 2016 and the authoritarian turn the AKP government took in its aftermath marked a turning point and the beginning of a slide, as investors began to pull out over concerns about the rule of law. Per capita GDP fell to $10,602 in 2017 and then $9,632 the next year.

Now we can only look back fondly on the days when we worried about falling into the middle income trap. With per capita income at current levels, Turks are on average nearly $2,000 per head poorer than they were 11 to 12 years ago.

The recent salary increases for workers and civil servants, who agreed to wage increases until 2021 that are far from matching inflation rates, is a sign that the situation is going to continue worsening for many.

The GDP data shows that the government is set to overcome the current economic bottleneck by reducing the public’s share of the national income, making low-income workers, retirees, the working class and unemployed pay the price for the severe economic crisis.

As much as the government may try to pass off the 1.2 percent growth in the second quarter of 2019 compared to the first as a positive sign, Turkey would require 5 percent yearly growth at a minimum to get back on its feet. It will take years to reach that level.

Eight years ago, while he was campaigning for the 2011 national elections, President Recep Tayyip Erdoğan – then prime minister – vowed to brıng GDP to $2 trillion and per capita GDP to $25,000 by the 2023 centenary of the republic.

With income actually on the way down, he has been forced to backpedal from that promise.

The shrinking investment, industrial and construction sectors show there are few expectations of the government reviving the economy, attracting investment and increasing employment.

It seems impossible that a heavy-handed government that enforces its economic policies through intimidation and pressure will regain investors’ trust in the short to medium term.

In other words Albayrak’s models have completely failed to meet their targets, collapsing within a year of being announced.