In my August 1 article, I explored the question, “Is the economy contracting?” Recent data releases now make it easier to lean towards a more definitive ‘yes.’
The industrial production data released last Friday reveals a 2.1 percent decline in June compared to the previous month. Although this data is seasonally and calendar-adjusted, the adjustment method may not have fully accounted for the extended holiday period in June. This prompts a closer examination of the quarterly data.
The situation appears even more concerning on a quarterly basis. While industrial production grew by 3.2 percent in the first quarter, it plummeted by 3.9 percent in the second quarter. This reflects the trend in the industrial sector. The service sector, which has a significantly larger share in national income, is also showing signs of trouble. Data released yesterday by TurkStat on retail sales volume and trade sales volume underscores this. Both indicators saw substantial increases in the first quarter compared to the previous quarter, but the trend reversed in the second quarter, with retail sales volume contracting by 0.5 percent and trade sales volume by 3.6 percent. Again, these are seasonally and calendar-adjusted figures.
Labor market data for June, also seasonally and calendar-adjusted, presents another worrisome picture. Within a single month, the unemployment rate jumped by 0.7 percentage points, and the broad-defined unemployment rate surged by 3.8 points. This occurred even as the labor force participation rate declined, highlighting the limitations of relying on just one month of data.
On a quarterly basis, the unemployment rate remained unchanged from the previous quarter, but the broad-defined unemployment rate increased by 2.3 percentage points. There were modest increases in both labor force participation and employment rates. In the study referenced at the beginning of this article, I included second and third-quarter growth forecasts from two significant reports, both of which predicted a contraction compared to the previous quarter. In summary, the outlook for growth and employment is bleak.
To wrap up, let’s return to the broader issue. If the economic program remains heavily reliant on monetary policy, negative outcomes for growth and employment are inevitable.
One might argue that there are efforts in fiscal policy. However, fiscal policy is not being utilized effectively to counteract these adverse effects. The option of increasing the tax burden on high-income groups has been largely avoided. On the expenditure side, no significant steps have been taken to address revenue guarantees tied to PPP projects.
These concerns are immediate, but the real solution lies in structural reforms that could reduce the costs of disinflation and, if external conditions are favorable, might not result in significant costs at all. However, there has been no progress on this front. There are no reforms to the Tender Law, no changes to the institutional structure of TurkStat, no adjustments to the rent law, and no advancement towards a fair and efficient legal system. Work on the 2025-2027 Medium Term Program should already be underway. Time will tell if it includes concrete policy measures rather than just general aspirations.