The Kapali Carsi

Japan’s (and Turkey’s) J-curse

In my latest Hurriyet Daily News column, I discuss why the weakness in the yen did not result in an improvement in the country’s trade balance, as the J-curve effect would predict (and therefore it is a curse)- and what this would mean for Turkey. As usual, you can read the whole thing at the HDN website. For a change, I only have a couple of additional points to make, mainly in response to my Twitter followers, who made excellent comments when I tweeted the column:

One reader asked me to specify “the numbers”: I don’t want to get into too much details, especially forecasts, in the column for a number of reasons. For one thing, I have limited space (3000 characters, about 500 words) in the column- space that I would not like to spend with spitting out a bunch of projections that will not hit bull’s eye anyway:) And besides, the thing I hated most about being a market economist was that I had to have forecasts for everything. And so I enjoy the very bearable lightness of being solely a columnist- and yet another movie reference!:) Anyway, I expect the current account deficit to be 5-5.5 percent of GDP this year. Considering it was probably (we’ll know for sure at the end of March when 4Q13 National Accounts are released) 7.5 percent of GDP at the end of 2013, that is quite an adjustment, but nowhere near the 2.5-3 percent some are expecting (for example credit ratings agency S&P in its latest assessment of the Turkish economy). BTW, as I mentioned in the column, the mean of projections in the Central Bank’s survey of expectations ($53 bn)is a bit higher than this, but their growth forecast of 2.8 percent is also higher than my 2-2.5 percent. Besides, those expectations lag a bit; we’ll probably see a downward revision in both growth and deficit expectations when the Central Bank releases the March survey in a couple of weeks. To give you some sort of perspective, Ozlem Derici of Deniz Invest sees the end-year deficit at $ 46.6 bn, corresponding to 5.9 percent of GDP.

Moving on, another Twitter follower noted that we observed a J-curve effect in 2011. I had in mind 2009, when we didn’t. That’s what I actually meant when I noted in the column that ” the deficit is now less sensitive to lower growth rates”. In other words, I believe 2009 was no exception; 2011 was! Unless Turkey undertakes key structural reforms to tackle the country’s competitiveness, among other things, that will be our “new normal”. BTW, I am not the only one who thinks so: Ankara think-tank TEPAV’s director (and fellow HDN columnist) Guven Sak recently made similar arguments in his column in Turkish business daily Dunya. He thinks that, in addition to energy imports, the plunge in the savings rate and the country’s deindustrialization are to blame.

He may be right, but it is important to note that Turkey’s saving rate is falling since the mid-80s. So this is not a new phenomenon:

Similarly, while the share of industry, and specifically manufacturing, in GDP has been on the decline, it has actually risen a little bit in the last decade:

That’s all folks…

One Response to “Japan’s (and Turkey’s) J-curse”

TugrulBelliMarch 3rd, 2014 at 4:04 pm

I definitely agree with your main theme that the current account will not balance as much as some people think. I just want to make a comment about the last chart you make use of, not least because I used a similar chart a couple of months back in one of my weekly essays in Dunya. (… The chart itself does not show up on the page due to Dunya’s failure to post it though.)

The ratio of manufacturing to GDP has actually been in a (using the “de rigueur” word) “secular” decline in Turkey for at least the last 15 years. Why this is not clear in your chart is that you are making use of “constant” prices, rather than the nominal prices. While constant prices are good to see real changes between 2 successive periods, the nominal prices should be used to see what the exact situation is at a certain point in time. If nominal prices are used, we see the share of manufacturing declining from around 24% in 1998 to 15% in 2013. With years of such low levels of investment in manufacturing, this comes as no surprise. (The most recent sizeable investment in manufacturing was the Ford plant back in 2002, as Gungor Uras mentioned in one of his recent essays.) BTW, I don’t think it will go down below 14-15% levels simply because it is already the rock bottom!