On September 12, two essential data for July were announced: Labor force and balance of payments. In summary, the situation is like this: The unemployment rate is still at a high level, in particular, the broadly defined unemployment rate is referred to as the ‘underutilized labor rate.’ On the other hand, the current account deficit continues to rise. The deficit financing comes from the “net errors and omissions” item, which is conspicuously unknown. Let us start with the workforce first.
The labor data has gotten weirder lately. The employment rate and the unemployment rate are falling simultaneously. How does it happen?
Umemployment: Really on the decrease?
Our citizens, who suddenly find themselves ‘pushed out the door’ of the workplace, somehow stop looking for a job and are not counted in the unemployed category. For the same reason, they are not included in the workforce. However, if they were looking for a job, they would be considered unemployed and in the workforce. It is a mystery why they give up looking for a job. Who knows they might just be tired of working.
The figures for July are as follows: Total employment (seasonally adjusted) decreased by 148 thousand compared to a month ago. Our economy has created fewer jobs. Under normal circumstances, the decline in employment is expected to affect the unemployment rate adversely. Nonetheless, within a month, the number of unemployed people who gave up looking for a job and therefore left the workforce has also increased. As a result of these developments, labor force participation dropped by 262 thousand people. Similarly, there is a decline in the number of unemployed people: 113 thousand people.
High increase in underutilized labor rate
As a result, the unemployment rate also fell: to 10.1 percent, a noteworthy; 0.3 points. I must admit that I was confused while writing the article; double checked to see if I was doing it wrong; no, it is accurate.
Nevertheless, TÜİK also publishes data on the ‘composite measure of labor underutilization‘ which is calculated by adding the ‘unemployed,’ ‘time-related underemployment,’ and ‘potential workforce.’ Time-related underemployment is defined as those who work less than forty hours but want to work more. The potential workforce consists of unemployed people who are not counted in the workforce because they are not looking for a job but will accept a job if offered. The broadly defined unemployment rate – the underutilized labor rate – rose by two percentage points to 22.5 percent, an exceptionally high figure for one month.
How would be the path from now on?
In the third quarter, which we are about to complete, we receive enhancing signals of the slowdown of our economy. It is not unlikely that our growth rate will remain relatively limited compared to the second quarter. The upcoming election is expected to amplify public spending and credit supply. The timing is crucial: If postponed until the next year, our economy may contract in the fourth quarter compared to the third quarter.
Global growth, on the other hand, is expected to decline through the remainder of 2022 and 2023. Europe, where we realize almost half of our exports, most likely will enter a recession, which is not good news for our growth rate. Mirror reflection will be observed in employment. Clearly, these possibilities will not be employment-friendly if they materialize. An increase in the unemployment rate is expected, and there will be a similar development in the rate of the underutilized labor. If an immediate election-related spending is preferred, how growth and employment will path depends on our current account deficit and our capacity to find foreign currency, which requires a thorough analysis.
The current account deficit is hiking
The current account is gradually signaling more troublesome. In July, our current account deficit was 4 billion dollars. Thus, the current account deficit for the first seven months reached 36.7 billion dollars. However, in the same period of 2021, we had a current account deficit that was well below – $13.7 billion. Therefore, there is a considerably elevated increase in the current account deficit.
The more appealing point is that financing the current account deficit by ‘standard’ channels is very low. Financing with net capital inflows in the year’s first seven months is only 4.4 billion dollars. Compared to $36.7 billion, this is a shallow value. $7.9 billion of the financing was provided by the meltdown in the Central Bank of the Republic of Turkey (CBRT) reserves.
A boost in net errors and omissions
The most troubling occurrence in the balance of payments statement is that the ‘net errors and omissions’ item reached $24.3 billion in the first seven months. Under normal conditions, this item is mainly caused by statistical measurement errors. For example, it is unlikely to know how much foreign currency every tourist spends in the country, as calculated by surveys. Since statistical errors do not constantly develop in the same direction, it is expected that the long-term average of the net error and omissions item will be close to zero.
However, our net errors and omissions are constantly increasing cumulatively. For example, the value of the last five years (expected to be close to zero) was exactly 47.9 billion dollars in July. It is an issue. Of course, it can be said, “So what? The essential thing is that the need for foreign currency arising from our current account deficit is met”. Nonetheless, it is not; why is this value so high? For what reasons does this result occur? The CBRT, which orders the data, should ask these questions and seek answers.
What is next?
It is difficult to answer how our current account deficit will trail. On the one hand, it is expected that our exports will be negatively affected due to the possibility of a global slowdown that I mentioned above – especially since Europe will most likely enter a recession. On the other hand, our slowing economy means we import less. The first will amplify the current account deficit, and the second will reduce it.
There are three other determining factors:
- How will energy prices evolve? It is hard to say anything about energy prices.
- When will the election-related spending be implemented? Any policy that stimulates the economy will lead to a rise in imports.
- Net tourism revenues, which is good enough.
If the economic slowdown begins immediately and energy prices do not fall, the current account deficit will likely exceed fifty billion dollars. So, will there be any difficulties in financing?
The following ‘keywords’ immediately come to mind: striking boost in net errors and omissions, Russia, Saudi Arabia, Qatar… This is a matter beyond my expertise. Let the foreign policy experts of Yetkin Report contribute.