Turkey needs growth to bridge jobs gap

ANKARA (Reuters) – Turkey cannot afford its recent strong rates of economic growth to slow if it is to meet the demands of a young and growing population for jobs while it tackles its gaping current account deficit. Turkish industrialists are now calling for more flexibility in labor markets, social security and tax reforms and less red tape to ensure growth remains high for the European Union applicant country. «We should not forget that we are part of a global economy where our firms have to compete and where wrong economic decisions have a cost,» said Umit Izmen, deputy secretary-general of the top Turkish business group TUSIAD. The government is forecasting economic growth at 5 percent this year, a rate dwarfed by growth of 8 percent on average over the past four years. The central bank’s latest survey shows businesses expecting growth to be 4.7 percent this year. Analysts say the center-right government must consider microeconomic reforms such as reducing tax rates on bank lending and electricity privatization to back its successful macroeconomic policies. TUSIAD’s Izmen said she expected economic growth to return to 7-8 percent from next year as a new government with a new mandate would find it easier to start bold economic reforms. Turkey holds parliamentary elections in November and the ruling AK Party is set to win another five-year term, according to recent opinion polls. But others are less optimistic about the growth outlook. «I think growth will probably be in the 4-6 percent range in the next three to five years – the current account deficit is too large and therefore domestic demand will have to slow down,» Danske Bank senior analyst Lars Christensen said. Without significantly higher productivity growth there will not be room for higher growth than that, said Christensen. The central bank raised interest rates sharply last year and has said it would maintain its tight monetary policy to rein in domestic demand and high inflation. The government instead hopes robust exports, easing oil prices and a global investment appetite could contribute to growth. Higher rate required Turkey’s average growth rate since 1950 was a modest 3.5 percent and its fast-growth years were followed by crises and recessions. But analysts said this had changed due to a series of IMF-backed reforms since Turkey’s deep 2001 financial crisis. «Thanks to the reforms and opening up of the economy after the crisis, Turkey’s long-term potential growth rates have risen to 5 percent per year… if Turkey continues with reforms this could even rise to 6 percent,» Garanti Bank’s head of research department Ali Ihsan Gelberi said. But analysts say that 5 percent can hardly be described as sufficient for Turkey as it tries to catch up with far wealthier European economies and create jobs for a fast-growing population. Currently Turkey’s population exceeds 72 million. «It is obvious that 5 percent growth is not sufficient, and high growth in recent years did not create jobs because that growth did not come from production,» said Sinan Sonmez from Atilim University. He described Turkey’s fast growth as fragile because Turkey depends on inflow of short-term capital investments to fund higher consumption and finance a large current account deficit.