Turkish Economy: A Path of Destruction and Poverty

Last week’s economic agenda in Turkey was dominated by the debate over the future of Finance Minister Mehmet Şimşek. The economic administration held meetings with various capital groups, some of which were received by President Recep Tayyip Erdoğan.

Although objections to the Şimşek program from smaller capital groups have not been publicly voiced, the decline in vital indicators such as firm bankruptcies and unemployment will make these voices more audible in the future.

This week’s economic agenda was marked by important data releases, including economic growth and inflation data, which highlight the destructive impact of the Şimşek program on the economy.

The Economy is Slowing Down

Turkey’s economic growth data shows that the economy grew by 2.5% annually in the second quarter, well below historical averages. On a quarter-by-quarter basis, the economy stagnated, growing by 0.1%.

Household consumption has shrunk sharply, reflecting the poverty experienced by many. Public expenditure and fixed capital formation almost stopped in the second quarter.

Foreign Trade Data: A Cause for Concern

Mehmet Şimşek declared that the process of ‘rebalancing in growth’ has begun, but this may not be the positive development he claims. The equalization of poverty is not what is desired, and the growth path is expected to reduce the current account deficit and dependence on capital inflows.

The positive contribution of net exports to growth is due to a decrease in imports, not an increase in exports. The decline in imports is not due to a decline in consumer goods, but rather a decline in intermediate goods, which is a sign of economic crisis.

The Industry is Shrinking

The industrial sector is contracting, and investments in machinery and equipment are shrinking by 5.6% annually. This shows that the productive capacity of the economy will shrink in the period to come.

Reduced investment may help reduce inflation in the short term, but the erosion of productive capacity is inflationary in the long term. The Şimşek program is sacrificing the future to save the day.

Base Effect: A Temporary Reprieve

Inflation fell to 51.97% last month, mainly due to a rebound in inflation caused by the Şimşek administration. The base effect and economic slowdown played a role in the decline in inflation.

However, the way inflation is reduced by slowing down the economy, and the way the cost of this is passed on to workers, shows the poor aspects of the Şimşek program and the destruction of the productive structure of the economy.

A Narrow Path Ahead

In the period to come, the path ahead of the Şimşek program will further narrow. The economy will slow down further in the second half of 2024, leading to further destruction of productive capacity and an increase in unemployment.

The new Midterm Programme, published this week, will contain clues to this course. The future of the Turkish economy looks bleak, and it remains to be seen how the government will address these challenges.