Technically speaking, it hasn’t happened quite yet, but for all intents and purposes the Turkish economy is in recession.
Looking at it from Jerusalem (diplomacy) or Tel Aviv (business) this might not seem to mean much, apart from a little schadenfreude at the sufferings of a long-time adversary like Turkish President Recep Tayyip Erdogan. His AKP Party faces voters in municipal elections next March and with the economy in free fall, his party’s prospects aren’t looking very good.
In fact, Turkey’s economic woes have much bigger implications. In a prolonged downturn Turkey won’t have the luxury of being an aspiring regional power and bumping heads with the United States. It could even spell the end of the Erdogan era. All of that could be good news for Israel.
But first about the recession, which is usually defined as two consecutive quarters on contracting gross domestic product.
Shoppers shrink back
Last week, the Turkish government reported the country’s first quarter of contraction: economic output fell 1.1% in the third quarter from the second, Ankara said. The fourth quarter is virtually certain to mark a second three-month period of decline because the indicators point that way.
Industrial production and investment have declined sharply, and consumer spending is in a funk. The only thing that prevented things from being worse is that the government is spending madly and imports have fallen (although the latter is because businesses and consumer can’t afford them).
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The recession hasn’t officially arrived, but the pain has already reached down to ordinary Turks. This year’s meltdown of the lira -- the proximate cause of Turkey’s current problems – forced the central bank to raise interest rates to a punishing 24%. Annual inflation has soared to 25% and the jobless rate is well into the double digits. The devalued lira has caused exports to grow, but Turkish consumers are cutting spending so quickly that it doesn’t make any difference to the economy.
The International Monetary Fund still says Turkey’s economy will eke out growth next year of about 0.4%, but private sector economists are gloomier – Moody’s forecasts 2% contraction in GDP and Citigroup puts it at 3.3%. Foreign investors, whose capital Turkey badly needs, have been taking their money out of the country in droves.
There are good reasons to believe this could be a sustained crisis.
Voodoo in Ankara
The Turkish corporate sector is weighed down by debt, the odds of a global recession or slowdown are growing, and Erdogan has a record of sustained economic mismanagement.
Last summer’s lira crisis was prompted by Trump, but Trump was just the final nudge that Turkey’s economy needed to fall off the cliff. Erdogan was engaged in voodoo economics, pumping up the economy on cheap credit and insisting against conventional economic wisdom that high interest rates cause inflation.
The Turkish president now faces nothing but unpalatable yet fateful choices.
His reputation overseas may be built on his image as an Islamic leader and strongman, but at home much of his appeal has been based on Turkey’s sustained economic growth. Without that, he will be politically vulnerable.
Moreover, his ability to meddle in the region, which is also popular with voters, will be constrained. It costs money to be an aspiring regional hegemon, especially if you haven’t been very successful at it.
Erdogan could go back to his old policies of easy credit ahead of the elections, and there are a lot of worries that is what he is scheming. But that would leave Turkey and Erdogan in even worse economic shape later on.
Another strategy is to cozy up the U.S. Tensions in Washington over the Kurds and other issues have driven Ankara closer to Russia, but there’s very little Russia can do to help Turkey overcome its economic crisis and save Erdogan. Russia itself is in bad shape economically and doesn’t have the financial resources to help.
But a thaw with the U.S. would remove much of foreign investor concern over Turkey, bring an end to U.S. tariffs on Turkish steel and could serve as a gateway to getting a badly needed loan from the IMF. Erdogan hates the idea of being tied to what he calls the “IMF yoke,” but his options are narrowing.
So where does Israel fit in? One way to find favor in Washington, certainly in the Trump era, is to make nice to Israel. From Erdogan’s point of view that’s another unhappy choice, but certainly a better one than, say, conceding anything vis-à-vis his sworn enemies, the Kurds.
In any case, it would only require him to tone down his rhetoric. Bilateral trade has been quietly flourishing even as Erdogan routinely attacks Israel for its Nazi-like behavior. So it wouldn’t involve any strengthening of economic ties. In Gaza, Turkey would have to restrain its support of Hamas, but arguably it has already taken a back seat to the Qataris anyhow.
This could buy Erdogan time, but given the depth of Turkey’s economic problems it can’t save him. The Erdogan era is effectively over. Even if he remains in office till the next national elections, his days as a powerful leader ready to dis America and interfere with his neighbors are coming to an end.