Second wave in Europe and Turkey's soft landing

Turkey has been on a striking growth track since the last quarter of 2009, shortly after the worst period of the global financial crisis was left behind. The Turkish economy grew by 8.9 percent in 2010 and, despite the deep turbulence in Europe -- Turkey's biggest trade partner -- growth in 2011 reached 8.5 percent. This performance put Turkey amongst the top growth poles worldwide.

The most important characteristics of this growth performance are that Turkey has become one of the job-creating champions of the world. The rate of unemployment, which hit its historically highest level of 16 percent in April 2009, fell back to almost 10 percent by the end of 2011, as almost 3.5 million new jobs had been created since early 2008.

However, a simple growth accounting highlights the fragile aspects of the Turkish economy's growth as well. While the impact of external sectors on growth performance is strongly negative, domestic demand from the consumption and investment front created an overwhelmingly positive impact on growth.

Also, as the overall national saving rate decreased to its historically lowest level of between 12 and 13 percent of gross domestic product (GDP) in the last couple of years, Turkey's high growth has required the inflow of foreign financial sources. The volume of financial flows has shifted from foreign direct investments (FDI) towards short-term portfolio investment as the global economic climate deteriorated.

As mentioned above, these two negative aspects of Turkey's growth are reflected in the country's CAD, inflation and accumulating private debt stock. In the long run, Turkey needs deep supply-side structural reform measures so as to increase its potential growth level, increase supply of national savings, and therefore eliminate financial bottlenecks and external deficit constraints. Until Turkey achieves remarkable success in this field, Turkey's options are limited by the availability of its short-term fiscal and monetary policy toolbox. However, it seems the space in which Turkey can maneuver is being squeezed as the priority of growth-employment and price stability have started to reveal their conflicting natures.

For instance, it seems that the economic situation is still quite fragile in Europe. Not only are the fiscal structures of major countries still in pretty bad shape, but their economies are also stagnated. Because of belt-tightening measures, there is almost no economic growth, resulting in a further rise in mass unemployment. The situation in Europe is exposing an obvious example of a vicious cycle without clear exit strategies. Many economists, including myself, are expecting a second wave of the crisis in Europe. As Europe constitutes almost 20 percent of the global economy, this will have negative effects on the growth and employment dynamics for the world economy, too. Therefore, we can expect a downward pressure on the price of commodities, including oil and natural gas, for which Turkey is almost fully dependent on foreign supplies. This is good news for tackling the CAD, as well as inflation this year. However, as Turkey's biggest market -- its exports market -- will contract, the country has to rely more on the domestic market for achieving an acceptable growth rate of around 5 percent. Therefore, from the viewpoint of timing, it may not be an appropriate policy for Turkey to continue tightening its fiscal and monetary measures for the rest of the year. In this regard, there is no need for policy rate hike for the Central Bank of Turkey.