‘Despite the deterioration in macro-economic outlook, the extraordinary increase in demand, created by inflation, prevents growth from turning into contraction and unemployment from increasing – and people think that the economy has not collapsed.’
The quickest way to get a bird’s eye view of a country’s economy is to look at macroeconomic data. The most important of these data are indicators such as growth rate, unemployment rate, inflation rate, budget deficit/surplus, current account deficit/surplus, national currency against foreign currencies, the country’s risk premium (CDS premium and rating), indebtedness ratio, and loan/deposit ratio.
The state of these data gives an idea about the economic situation of a country. When these data are compared with the past five or six years, a certain judgement can be made about the direction in which the country’s economy is heading.
This approach of understanding the course of the economy with macro data is valid for most of the countries in the world. It is not enough to look at macro data to understand the economic situation of some countries, because the accuracy of those data is questionable. Argentina and Turkey are examples of this last group.
That is why, it is said, there are three types of economies in the world: Developed countries, developing countries, and Argentina and Turkey.
Macro data show us that the economic situation is quite bad. No one is satisfied with the fact that the growth rate is still high, even though it has halved compared to the previous year, and that the unemployment rate is declining and inflation is on a downward trend. These data are well-known.
There is a widespread belief, however, that growth is lower, and real unemployment and real inflation are more than twice as high, as announced. The Turkish Lira is experiencing serious depreciation against foreign currencies. The budget balance, which was good until last year, has been running incredible deficits in the last two years, and the current account balance continues to deteriorate rapidly.
In addition to the announced data, this situation shows us that the Turkish economy is in serious crisis. The interest rate hike after the elections, the successive tax increases, the record deterioration in the Treasury cash balance, and the current account balance tell us that the reality is far worse than what is reflected in the data.
The micro outlook is different from the macro outlook.
There is an unbelievable frenzy of consumption everywhere. Shopping centres are full, restaurants and cafes are full, traffic is heavier than ever. During the holiday season, queues of thousands of cars form at the entrance to resort towns. Hotels in holiday resorts are operating at full capacity even though they are two or three times more expensive than in previous years.
In order to buy a new car, it is necessary to deposit the money first and then queue up; car sales are breaking records. Housing demand continues unabated even though housing prices and rents are increasing exponentially.
In a nutshell, despite the deterioration in the macro outlook, the extraordinary increase in demand created by inflation prevents growth from turning into contraction and unemployment from increasing, and people think that the economy has not collapsed.
There are many ways of explaining this situation, which seems to be very different from the macro situation in the micro sphere. One of them is the effect of flight from money and the pulled-forward demand effect. In an environment where inflation is high and interest rates remain low relative to inflation, no one wants to save, and so they spend the money they have.
The recent tax increases have further accelerated this trend. Due to high inflation, the depreciation of the Turkish Lira against foreign currencies, and the pressure created by the new taxes, people are trying to buy things today that they think will be more expensive in the future.
In the past, people used to renew their cars every three to four years, but now they do it every year. They buy houses for investment purposes in order to maintain the purchasing power of their money even if they do not need it. Those who cannot afford them renew their white goods, buy new furniture, buy more consumer goods (detergent, shampoo, toilet paper, etc.) than they need and stock them in their homes.
The stock market continues to break records as interest rates are still much lower than real inflation.
In addition, I estimate that the GDP and per capita income in Turkey do not reflect the reality, that the informal economy is growing, and that a significant amount of money has entered the economy through illegal means, especially in recent years. These remain untaxed and unrecorded, but enter the system by being spent in the market. The money earned through illegal means and remaining unrecorded increases the expenditures of not only those who earn it, but also the people around them.
Since each expenditure creates the income of the person to whom it is directed, this tendency ripples outward.
Some sellers of consumer goods open stores in the most unlikely places. They stay there for a while and then close down because they do not do business. It is likely that some of these stores are opened by people who earn unrecorded money and their main function is to launder money or to bring unrecorded money into the system.
In addition to these, there are also the effects created by the large number of foreigners who have come to the country in recent years, spending lavishly from their untaxed income.
We can call the consumption increase effect created by this unrecorded income and wealth the “unrecorded multiplier effect”, based on the concept of the multiplier in economic theory.
As if confirming the proverb “what goes around, comes around,” those who earn this kind of money can easily spend it without calculating, buy luxury cars and houses, eat at the most expensive restaurants, and go on the most expensive holidays.
To summarize, there is a clear inconsistency between the country’s macro indicators and its micro lives.
If you ask which one is right, I believe that both are wrong.
This article was originally published in Mahfi Egilmez’s blog. It has been translated from the Turkish by FTP.
The views and opinions expressed above are the author’s and do not reflect those of the Free Turkish Press.
