Turkey's trio of economic challenges

Last week?s data exposed the economy?s ?trio of challenges.? For one thing, Markit?s purchasing managers? index (PMI), which was released on September 1, fell below the critical 50 threshold in August, ?signaling an overall deterioration in business conditions at Turkish manufacturers.?

Similarly, August inflation released on September 3, which came in higher than expected, hinted that the weak lira is taking its toll on prices. But the exchange rate and food inflation were not the only culprits: Despite a weakening economy, as evidenced most recently by Ankara-think-thank TEPAV?s August retail confidence index released on September 2, there seems to be a quite a bit of pricing power still. The possibility of stagnation and inflation, or stagflation, is worrying.

The effect of the weak lira, however, may be far from over. Commenting on the PMI results, Markit economist Trevor Balchin noted that ?manufacturers also faced the strongest inflationary pressure on input prices for a year-and-a-half.? It would be only a matter of time before they reflect at least some of these rising costs to their output prices.

Lower growth has in the past improved Turkey?s trade, and therefore current account, deficit- the country?s Achilles? heel. However, the real disappointment of the week was the trade statistics released on August 31. Despite low energy prices, the country?s annual trade deficit rose from $78.1 to $78.6 billion in July. The drop in exports more than offset the fall in imports due to the weakening economy.

But maybe, my concern is much ado about nothing. After all, Economy Minister Nihat Zeybekçi had underlined that 3 would be a competitive lira-dollar exchange rate. Now that...

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