The Turkish economy is literally being dragged into a stagflation trap. Stagflation is a heavy, highly troubled period in which a country's economy experiences rising inflation and unemployment problems with severe economic stagnation. In the 1970s, it took hold in developed economies, especially the U.S., affected by the oil crises. It happened in Latin American countries from time to time in the 80's and 90's and is an economic conjuncture that Turkey was also under the influence of for a short time. The most important reason why developed economies faced the stagflation curse was due to the fact that during cost inflation-based processes, central banks instituted harsh interest rate hikes and contractionary monetary policies without properly analyzing the reasoning behind the instability in prices, thus dragging their whole country's economy into a severe stagnation.
I have to regretfully say, today, some economists working as experts in banks and offering academic advice at our universities on a subject that has entered the economics literature while Turkey is experiencing a cost inflation phase are calling on the Central Bank of the Republic of Turkey's (CBRT) to urgently and effectively increase interest rates, which will drag Turkey into stagflation. It is a pity that the motive to be an opposition to the government turned into such blindness where marginalized, absurd market intervention rumors – that mean the Justice and Development Party's (AK Party) political suicide – are given credit and the CBRT's interest rate hikes are not perceived as great threats to drag Turkish Economy into stagflation. It is at this point that we observe manipulative concerns about the Turkish economy overheating that fuel the blinded perceptions of some businesspeople and professionals in the real sector, and the financial markets who are driven forward by the international economy media.
The article published in the Financial Times warning about the rapid growth in the Turkish Economy and overheating is precisely for this purpose. The article that brings up the independence of the CBRT and the allegations on the overheating economy is spreading a very dangerous analysis that can drag the Turkish economy into stagflation by implying that the CBRT should increase interest rates. Turkey is managing a financial discipline based on high growth and high tax income and curbing the rise in unemployment. Markets should know the following: If you bypass known errors in the economic literature and respond to these manipulative calls, you will drag the Turkish economy into high unemployment, high deficits and severe recession with high inflation. Will we wrap Turkey into this trap?
We should strengthen expectations
In terms of domestic and foreign economic actors, effective perception management toward the Turkish economy follows two main lines: Exchange rates and inflation.
The CBRT's many studies suggest that the Turkish lira's depreciation against foreign currencies at an average rate of 10 percent – at a currency basket level – has a 1.5 point increasing effect on annualized headline inflation. This is why, in a market environment that had remained calm until the digression in Moody's rating and which would enable a fall in the annual inflation to single digits with measures being taken and to be taken, the 5 percent increase in the currency basket in the last month means an increase for annual headline inflation of between 0.5 to 0.75 points. Turkey has been under the pressure of cost inflation over the last 1 1/2 years. Therefore, with the management of raw materials, labor, energy and financing costs, the macro-prudential measures that will be taken and with second-generation reforms, reducing the cost pressure on the Turkish economy is of paramount importance for the normalization of exchange rates.
Otherwise, the long-term impact of annualized inflation on consumer prices, as it seriously diminishes the attractiveness of profit-loss partnership rates and the deposit interest rate recommended for Turkish lira savings, brings with it the consequence of a shift toward foreign savings accounts in domestic savers. This situation also stressed the fact that inflation expectations for the next 12 to 24 months should be managed more effectively. While the accumulated inflation rate since 2010 has been 75 percent, that of the hourly labor cost is 134 percent and nominal unit wages are up by 94 percent. While the positive course in labor productivity meets some of the increase in labor costs, because of the increase in exchange rates, the rise in raw material and financing costs puts considerable pressure on the profitability of the real sector. It should not be forgotten that, with the intense efforts of our Ministry of Energy, especially in the last two years, all measures and steps have been taken to minimize the increase in energy costs.
The positive contribution of the Turkish real sector to growth with its export move in 2018, as also in 2017, is linked to not only production costs but also the management of expectations for inflation and exchange rates in order to strengthen our position in the global competition. Particularly, we have to address the need for market management that will prevent domestic economic actors from being affected by marginalized market speculations and will reduce fluctuations in exchange rates. In order to also manage the new global uncertainties stemming from the U.S. Federal Reserve (Fed) and the European Central Bank (ECB), it may be useful to nurture market excitement toward a new generation of reforms.
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