SAFAKNA TURKEY – A recession is expected to begin in developed countries within a year. Despite this price, the countries in question, while signaling that they continue to raise interest rates and fight inflation, seem to unanimously show that they are more afraid of the costs of inflation.
Will cutting rates lower inflation?
Turkey, which has severely separated itself from the rest of the world with the political moves it has chosen since the last quarter of 2021, has also separated itself from the rest of the world with the results it has achieved at the end of the year. Headline inflation, which peaked at 85 percent during the year, is expected to hit 70 percent by the end of 2022. On the other hand, in 2023, given the base effect, credit crunch, the expected slowdown in Europe and the fall in commodity prices, it seems possible that inflation will only fall to 40 percent.
The decline in inflation will not be due to lower interest rates, but partly due to technical reasons, partly to external events and partly to measures taken to mitigate the risks associated with lowering interest rates.
Was it worth the price paid?
While the rest of the world has been raising interest rates against global inflationary pressures, Turkey has opted to cut interest rates. The reason for the rate cut was identified as “growth + disinflation” at the beginning of the year. It was predicted that lowering the interest rate would boost exports due to the low exchange rate, while higher exports would strengthen TL and remove inflationary pressure from the exchange rate.
In the middle of the year, when inflation approached 80 percent and it became clear that inflation could not be brought down by a low interest policy, it was said that the goal was “growth against inflation”, that is, inflation was tolerated with the goal of growth.
Is growth possible with inflation?
We all want to grow. However, it is necessary to look for answers to the questions whether we were able to grow due to inflation or whether we were able to reduce unemployment due to inflation.
In 2022, inflation increased by 65 points. Unemployment fell by about 1 point. As of the third quarter of 2022, the growth was 3.9 percent, and the share of labor in gross value added decreased from 29 percent to 26 percent compared to the same quarter of the previous year. In this case, it is better to sit down and think. Was it the right policy to impoverish most of society (and, above all, segments with a fixed income) in order to reduce unemployment by one point? Isn’t there a less expensive way to cut unemployment?
Since the path to reducing unemployment is sustainable growth, and the path to sustainable growth is price stability, there is unfortunately no equivalent to the “growth with inflation” model. While this may seem feasible in the short term, accumulated inflationary pressures spread over the long term and negatively impact economic growth and employment. Because while inflation reduces purchasing power, it also dampens demand, blunting investment appetite. So is the slowdown we saw in the second half of 2022.
It is for this reason that in the rest of the world the fight against inflation is considered a top priority. Because it is known that the price of inflation is lower than the cost of fighting inflation.
Capturing the economy after the elections and alternative scenarios
The first half of 2023 will be a period during which efforts will be made to maintain a “growth with inflation” policy, support demand ahead of elections, and major vulnerabilities remain. Vulnerabilities created by new support programs will be addressed by additional measures and rules.
The question that interests us all is how economic policy will develop in the post-election period.
Unless there is a change of government after the elections, there will be no dramatic change in economic policy. At this point, the question arises of how long the current conditions can be maintained. It is difficult to answer this question. The continuation of the current policy depends on maintaining the pressure on the exchange rate, which until now has been possible through external debt or debt repayment deferral. We can say that this system cannot be sustainable in the long term and that the risks are increasing. Where we cannot borrow money, sooner or later a return to traditional politics will be inevitable. However, it is very difficult to give a date for this turning point. If current policies continue into 2023, the loss of momentum that began in 2022 could continue and lead to growth at 3-4 percent per annum.
If there is a change of power, then the traditional policy will be immediately returned. While rising interest rates are inevitable, “strong but gradual” interest rate increases and inflation expectations will be anchored because very high growth risks a sudden slowdown in the economy and a number of vulnerabilities. In this scenario, growth in 2023 could fall below 3 percent. However, it can be said that with the right monetary and fiscal policies, future growth will be fast and strong, capital inflows and investment appetite will increase, and central bank reserves will begin to replenish.
We have left behind a very difficult year economically. The transition to traditional policies will need to take into account the growing risks and vulnerabilities inherited from this year. This will inevitably lead to a loss in the speed of the healing process. But there are no dark clouds ahead. The root causes of the problems we face are clear, and there are solutions for those causes. With the right policies, it is also possible to cut costs and start the recovery process quickly.
Turkey has experienced economic crises before and managed to get out of them with the right policies. He will do it again.
Let’s start the New Year with one of my favorite Mevlana quotes: “Don’t go to the area of despair, there is hope. Don’t go into the dark, there are suns
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