InvestMacro

By Cem Soner, Bangor University 

Is the tide finally turning for Turkey? Three months after the re-election of Recep Tayyip Erdoğan for his third term as president, which many feared would lead to economic chaos, ratings agency Moody’s has indicated that Turkey’s credit rating is on course for an upgrade.

Since the election, Erdoğan has installed a new economic team with a commitment to reintroduce conventional monetary policies after years of a more singular approach. This has yielded some early positive results, with June recording the first current account surplus in 18 months – meaning more money came into the country than went out (mostly due to tourism and lower energy imports).

Meanwhile, Turkey’s stock market has been attracting surging interest from foreign investors, and the cost of insuring against the risk of the government defaulting on its debts has sharply declined. So what’s going on?

The mess

When Erdoğan won the May election, contrary to the opinion polls, it extended his tenure as prime minister and then president to almost 20 years. This five-year term is likely to be his last, due to his deteriorating health and constitutional constraints. Thanks to the economic debacle that he created himself, it is also likely to be his most challenging.

There are two pillars to Erdoğanomics: the “unorthodox” view that high interest rates cause inflation rather than the other way around, and a fixation on keeping rates as low as possible. It became much easier for him to implement after becoming executive president in 2018, which gave him much more power.

Central bank governors who have disagreed with Erdoğan’s agenda have been shown the door, most notably Naci Ağbal, who was sacked in March in 2021 after only four months in office. It was the next governor, Şahap Kavcıoğlu, a former MP in the ruling party and columnist in a pro-Erdoğan newspaper, who put Erdoğanomics into overdrive. Turkey experimented with aggressively cutting rates at a time when inflation was already close to 20% and most central banks were tightening.

Official inflation skyrocketed to over 80% and the lira plummeted, forcing the central bank to sell substantial foreign exchange reserves to try and shore up the currency. The current account deficit widened to a record level in January and the earthquake in February further worsened the situation.

Turkish inflation and the falling lira

This all happened despite the fact that the authorities struggled to impose their interest rate cuts on the wider economy. Whereas normally high-street interest rates move in line with the central bank rate, Turkish banks responded to the central-bank rate cut by increasing rates on consumer and business loans and savings accounts, signalling they didn’t think the central bank’s policy was sustainable. Loan rates for businesses only later came down after the state-owned banks received a capital boost in the run-up to the election.

The interest rate divergence

A new approach?

The president has now taken a different path. He has appointed former investment banker Mehmet Şimşek as finance minister. Şimşek is respected by the markets due to a previous successful stint managing Turkey’s economy between 2007 and 2018. He has vowed to return to rational economic policies, announcing: “We will prioritise macro financial stability.”

Another reversal signal has been the appointment of Hafize Gaye Erkan as the first female governor of Turkey’s central bank. She too comes from investment banking, having formerly been managing director at Goldman Sachs and co-CEO of First Republic Bank in the US. She has no central banking experience, but markets nonetheless welcomed her appointment. She has an outstanding resume compared to her predecessor, Kavcıoğlu.

Erkan hiked rates on June 22 from 8.5% to 15%, the highest in nearly two years. The accompanying press release expressed a clear view that this is the way to reduce inflation.

The lira has nevertheless kept losing value, while annual inflation rose from 38% to 48% in July. But along with the other improvements I mentioned at the beginning, there has also been a slight improvement in foreign exchange reserves, indicating that the central bank is under less pressure to defend the currency.

In July, the markets were further reassured by the appointments of high-profile economists as new deputy governors for the central bank. This further decreased Turkey’s credit risk. On July 20, the bank hiked interest rates again, to 17.5%.

What next

Raising interest rates may have side effects. Turkey has one of the world’s highest percentages of “zombie firms” that have only been able to stay afloat because of low borrowing costs, so there could well be bankruptcies. Also, we know from the recent US banking failures that rate hikes inflict significant stress on banks by reducing the value of their bond portfolios.

Turkey’s banks are obviously not new to life under Erdoğan. They have some fine management teams and effective risk-management practices that are used to weathering the country’s economic storms. All the same, they look vulnerable because they hold low-yielding government bonds that could be impaired by aggressive rate hikes – particularly since they are denominated in lira, which creates exposure to further currency collapses. The government could alleviate this concern by swapping these bonds in exchange for new high-yielding ones.

The bigger question is whether we’re really seeing the end of Erdoğanomics or just a lull. We can’t rule out a repeat of 2021, when Ağbal was installed as central bank governor despite his orthodox economic views, then removed shortly after. Erdoğan has already put Şahap Kavcıoğlu, his biddable governor from 2021-23, in charge of Turkey’s banking watchdog, which doesn’t suggest a total break from the past and has confused markets.

The danger is that Erdoğan won’t allow interest rate hikes in the run-up to the local elections in March 2024. On the other hand, voters in cities such as Istanbul and Ankara have been severely affected by inflation. They overwhelmingly voted against Erdoğan in the presidential election, having already handed metropolitan control to the opposition in 2019.

To regain these cities, Erdoğan must tame inflation and alleviate the cost of living crisis. He may also be motivated by a desire to hand a better economy to his preferred successor (likely to be either his son or son-in-law), who might not enjoy his levels of popularity.

Whatever happens, much damage has already been done. The nation’s current GDP per capita is US$10,616 (£8,335), well below its peak of US$12,508 in 2013 (albeit it has grown for the past couple of years). Turkey has lost significant numbers of skilled workers to other countries.

Halting this brain drain, or even reversing it, will be crucial for future economic growth. This seems unlikely under Erdoğan’s leadership. Avoiding a financial crisis is only the first step forward.

About the Author:

Cem Soner, Doctoral Researcher in Finance, Bangor University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By Jay L. Zagorsky, Boston University 

The space industry has changed dramatically since the Apollo program put men on the moon in the late 1960s.

Today, over 50 years later, private companies are sending tourists to the edge of space and building lunar landers. NASA is bringing together 27 countries to peacefully explore the Moon and beyond, and it is using the James Webb Space Telescope to peer back in time. Private companies are playing a much larger role in space than they ever have before, though NASA and other government interests continue to drive scientific advances.

I’m a macroeconomist who’s interested in understanding how these space-related innovations and the growing role of private industry have affected the economy. Recently, the U.S. government started tracking the space economy’s size. These data can tell us the size of the space-related industry, whether its outputs come mainly from government or private enterprise, and how they have been growing relative to the economy at large.

Companies like SpaceX, Blue Origin and Virgin Galactic made up over 80% of the U.S. space economy in 2021. The government held a 19% share of space spending, up from 16% in 2012 – mostly thanks to an increase in military spending.

Ways to measure the space economy

There are many ways to measure economic success in space.

One way is the economic impact. The U.S. Bureau of Economic Analysis, which tracks the nation’s gross domestic product and other indicators, recently began to monitor the space economy and published figures from 2012 to 2021. The Bureau of Economic Analysis calculated the impact of space using both broad and narrow definitions.

The broad definition comprises four parts: things used in space, like rocket ships; items supporting space travel, like launch pads; things getting direct input from space, like cell phone GPS chips; and space education, like planetariums and college astrophysics departments.

In 2021, the broad definition showed that total space-related sales, or what the government calls gross output, was over US$210 billion, before adjusting for inflation. That number represents about 0.5% of the whole U.S. economy’s total gross output.

The Bureau of Economic Analysis also has a narrow definition that excludes satellite television, satellite radio and space education. The difference in definitions is important because back in 2012 these three categories represented one-quarter of all space spending. However, by 2021, they only represented one-eighth of spending because many people had switched from watching satellite TV to streaming movies and shows over the internet.

Space’s share of the economy

A closer look at the data shows that space’s share of the U.S. economy is shrinking.

Using the broad definition and adjusting for inflation, the relative size of the space economy fell by about one-fifth from 2012 to 2021. This is because sales of space-related items – everything from rockets to satellite TV – have barely changed since 2015.

Using the narrow definition also shows the space economy is getting relatively smaller. From 2012 to 2021, the space sector’s inflation-adjusted gross output grew on average 3% a year, compared with 5% for the overall economy. This suggests space is not growing as fast as other economic sectors.

Space jobs

The number of jobs created by the space economy has also declined. In 2021, 360,000 people worked full- or part-time space-related jobs in the private sector, down from 372,000 about a decade earlier, according to the Bureau of Economic Analysis.

The Bureau of Economic Analysis could not track all space-related government jobs since spy agencies and parts of the military don’t provide much information. Nevertheless, it has tracked some since 2018. The military’s Space Force, which is the smallest branch, adds about 9,000 workers. NASA has about 18,000 employees, which is half of its 1960s peak.

Combining these government workers plus all private workers results in just under 400,000 people. To give some perspective, Amazon’s U.S. workforce is over twice as big and Walmart’s is four times bigger than reported U.S. space-related employment.

Growing competition in space

The U.S. has long dominated the space economy, especially in terms of government spending.

The U.S. government spent a little more than $40 billion in 2017, compared with about $3.5 billion spent by Japan and less than $2 billion by Russia.

Moreover, most of the top private space companies are based in the U.S., led by Boeing, SpaceX and Raytheon, which gives the U.S. a leg up in continuing to play a leading role with the rockets, satellites and other stuff needed to operate in space.

The U.S. also published more than twice the amount of space research in 2017 as its next nearest rival – China.

But China is catching up and has narrowed the gap in recent years as top Chinese officials decided success in space is a national priority. Their goal is reportedly to surpass the U.S. as the dominant space power by 2045. China recently put a large space station called the Tiangong into orbit and aims to put people on the Moon.

China’s not the only one joining the 21st century space race. India is expanding its space economy rapidly, with 140 space-tech startups. India launched a rocket on July 14, 2023, designed to put a lander and rover on the Moon. And the European Space Agency’s Euclid spacecraft plans to map parts of the universe to study dark matter. The ESA released the craft’s first test images at the end of July 2023.

The U.S. has a strong foothold in space. But whether it can maintain its lead – as the space race moves into a new frontier of space mining and missions to Mars – remains to be seen.

About the Author:

Jay L. Zagorsky, Clinical Associate Professor of Markets, Public Policy and Law, Boston University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By George Prior 

Inflation in most major economies is likely to fall faster than many expect, and interest rates will drop accordingly within the next 12 months, predicts the CEO of one of the world’s largest independent financial advisory, asset management and fintech organizations.

The prediction from Nigel Green of deVere Group comes as there are growing signs around the world that inflation has peaked.

He says: “We expect that major economies, including the US, UK and EU will see inflation fall faster than had previously been expected over the next 12 months.

“There are three key reasons for this.

“First, there’s unlikely to be a wage price spiral as real wages are typically going down despite the increases.  Employers now seem to be holding back from increasing salaries on demand, which will help stifle wage inflation.

“Second, the time lag for monetary policies is incredibly lengthy. It takes around 18 months for the full effect of rate hikes to make their way into the economy – and that’s where we are – and so financial conditions will get squeezed even harder in the near term.

“And third, although many economies are now likely to avoid a full-blown recession, economic growth is still expected to be weak for the foreseeable future.”

Against this backdrop of inflation falling faster than expected, Nigel Green says that he expects “central banks, including the Federal Reserve, the Bank of England and the ECB, to start cutting interest rates within the next 12 months.”

This is why, he notes, that in the last earnings season, investors were pouring over the guidance more than usual.

“Guidance is critical as indicators show the economy is headed for a downturn and investors will be eager to know which companies are best-positioned to manage this. Guidance helps evaluate a company’s past performance in light of its future prospects.

“When costs are going up, investors should increasingly be looking at a company’s and a sector’s ability to maintain margin.

“Investors should be paying close attention to margin because it can indicate how well a company is managing costs and competing in its industry.

“It can also impact a corporation’s ability to invest in growth opportunities or pay dividends to shareholders.”

The deVere CEO concludes: “Investors should consider now the prospect of inflation falling faster than many have anticipated, to seize the opportunities and mitigate risks.”

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of offices across the world, over 80,000 clients and $12bn under advisement.

By George Prior

The US Consumer Price Index (CPI) is out today but it is the core inflation data, not the headline, that investors will be pouring over, affirms the CEO and founder of one of the world’s largest independent financial advisory organizations.

The comments from deVere Group’s Nigel Green come as the latest CPI shows a monthly increase of 0.2% for July and a 12-month rate of just 3.3%. A year ago, the annual rate was a staggering 8.5%, which was short of the highest level in more than 40 years.

Core CPI, a measure which strips out the volatile food and energy sectors, is at 4.7%.

The deVere CEO says: “Overall, the CPI data is pretty good news, with inflationary pressures substantially easing from their 2022 levels.

“But there are two main takeaways from today’s inflation report for investors.

“First, core inflation remains sticky – and this is critical to investors.

“High core inflation increases costs for businesses, including wages and raw material costs. If businesses struggle to pass these increased costs onto consumers through higher prices, their profit margins become squeezed. This then leads to reduced earnings expectations and consequently impact stock prices.”

He continues: “Second, even though the battle to tame inflation is being won, it’s not over yet.

“The Fed will want to be completely sure that inflation is fully under control and heading back to target before it even thinks about cutting interest rates – and we’re not there currently.”

On today’s CPI data, Nigel Green now predicts a pause in the Federal Reserve’s interest rate hike agenda following the next meeting of the central bank’s FOMC.

“The officials won’t and can’t say we’re completely done, but they also cannot ignore that the data clearly shows that things are going in the right direction. Therefore, we now expect there to be a pause in September.”

However, the deVere CEO goes on to add that he believes this is the time for the Fed to stop, not pause, rate hikes.

“The time lag for monetary policies is incredibly lengthy. It takes around 18 months for the full effect of rate hikes to make their way into the economy – and that’s where we are.

“We’re now starting to see the drag effects on the US economy with households and businesses becoming considerably more prudent. In addition, investors are becoming more and more concerned that additional hikes could steer the US economy into a major recession.”

He concludes: “Despite marginally good news from the data, it is core inflation that remains the major concern for investors.”

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of offices across the world, over 80,000 clients and $12bn under advisement.