2014 GDP Growth: Underwhelming

Turkey’s Gross Domestic Product expanded 2.6% in 4Q14, higher than the market consensus of 2.1%, bringing full year growth to 2.9%, compared with an upwardly revised 4.2% a year earlier. Stronger than projected stock drawdown was the key driver of the deviation from the consensus. The contribution of net exports and investments to GDP growth was negative. The data also suggested that the pace of economic activity slowed considerably in 2014, as the country has been facing quarters of sub-par growth.

Turkey - Real GDP Growth

Private sector investments continued to be the weakest part of the country’s GDP, as public sector investment expenditures had not been able to offset it. Investment spending decreased by 1% in 4Q14 (meaning a negative contribution of -0.3% to GDP growth). Private companies’ investment in machinery declined 3.7% in 2014, while the public sector’s purchases of equipment and spending on construction shrank 8.8%, according to the official data. On the other hand, household demand, which makes up two-thirds of GDP, grew 1.3% in 2014, compared with 5.1% in 2013. The drop was attributed to shocking rate hike in January 2014, and to the rising unemployment.

Turkey - GDP Components

The agricultural sector posted a 2% contraction in 2014. In contrary, financial services industry posted a robust 7% growth on annual basis. The industrial breakdown of Turkey’s GDP is as follows.

Turkey - Industrial Breakdown of GDP

There are questions to be considered mostly driven by slowing private investments, as the achievement of a sustainable growth rate appears doubtful in Turkey. Additionally, widespread loses among the leading indicators continue to point to a disappointing growth in the short-term. For instance, Purchasing Managers Index, or simply PMI, the manufacturing leading, is down to 48 in March showing a contraction. The reading has been on a declining trend since December 2014, and below 50 for the first three months of this year. The industrial production index was down to 112.26 from 130.3 in January. On the consumption side, the consumer confidence index drastically fell to 64.4 in March which was the worst print since the global financial crisis. In a nutshell, the 4Q14 GDP data did not provide encouraging signals, so did the leading indicators.

In a previous article about inflation, we noted no responsive policy implications by Turkish central bank after the worst March print since 2003. For this reason, we still expect the central bank to remain cautious, and more fiscal policy tools to be used for stimulating the economic growth.

Which Industries Create Most Jobs in Turkey

The day before I posted this article Turkey’s Finance Minister Mehmet Simsek had been complaining that state is growing in Turkey by giving the number of people employed in public utilities. Surprisingly he had been criticizing employment policies, and consequently the government while changes in the Cabinet is on the agenda. But then we saw tweeting about ongoing street clashes in Ferguson indicating that things got back to normal (#DirenFerguson).

One should ask which industries have created most jobs in Turkey recently. Surely and evidenced by the comments of a Cabinet member, the state has been one of the top employers in Turkey providing itself a sustainable power which is also a policy mostly run by less developed countries. Monthly job creation by industries data compiled by the Central Bank of Turkey shows significant trends in Turkey’s labor market between Jan 2009 and Jan 2014. Materialized, the chart below indicates contribution of each industry to new jobs.

Turkey Contribution to Employment by Sectors

Firstly, despite the remarkable growth in the market, poor employment performance in mining industry shows why Erdogan compared the Soma disaster to mining accidents in 19th century Britain and nonchalantly observed that accidents are “what happens in coal mining”.

As expected, the role the construction played in creating jobs is absolutely nonignorable. Concerns around prosperity bubble are rising in Turkey which would ultimately lead the labor market to collapse. Since Jan 2009, the employment in construction has grown by 65% adding 655k new jobs.

More than 20% of the workforce is employed in agriculture in Turkey proving the country has a lot of challenges to face to be able to reach its high-tech export targets. Relatively, South Korea only employs 7% of its workforce in agriculture according to the World Bank data.

Finally, and most importantly, Turkey’s civil service is continuing its steady expansion making the Turkish public sector’s weight on the country’s economy is quite considerable when compared to other nations. According to Mehmet Simsek, Turkish public sector accounts for 3.37 million people as of the end of June. Tragically securing a government job in Turkey is not an easy task thanks to the high level of politicization.