Terms of Trade - A J-Curve Anomaly in January?

Of all the factors determining the state of a particular economy's business cycle, the most easily overlooked is movements in the terms of trade (ie, movement in export prices relative to import prices). Yet for an economy with a significant trading sector, time and again it proves crucial both to industrial sector profitability and to the cash flowing into or out of the financial sector from it. Turkey's merchandise exports are still only around 17.7% of GDP, but imports are 31.5% of GDP, and the principal financial determinant right now is the pace at which Turkey corrects a private sector savings deficit which burst out to around 9% of GDP last year. So we need to keep an eye on Turkey's terms of trade.

January's data shows export prices down 0.2% MoM and 0.31% YoY, whilst import prices fell 2.3% MoM but rose 2.95% YoY. The net impact of this is that Turkey's terms of trade rose 2.1% MoM, but still fell 3.3% YoY.

When reading the YoY comparisons, remember that in January, the Lira was down 15.1% YoY against the US dollar.

The good news is that although export prices fell in lira terms, the sharp collapse in momentum seen during 2Q and 3Q last year has abated. The bad news is that this abatement alone will not stop YoY comparisons becoming increasingly negative during the first half of this year, before recovering (possibly) in the second half. In sectoral terms, manufacturing export prices were up 7.2% YoY, whilst agricultural prices were up 1.1%, fishing prices were up 15.4%, and mining prices were up 13%. Within manufacturing, the highest YoY rises in prices are seen in basic metals (up 22%), food products and petroleum products (both up 14.9%). But export prices for communications equipment are down 13.5% YoY, motor vehicles are down 4.8% and machinery is up just 0.9%. Prices for textile exports are up 12.8% YoY, clothes up 7.6%.  

It is not immediately clear why Turkey's terms of trade recovered so strongly in January, reversing most of the near-collapse seen between July and October. The data tells us that the price of agricultural imports fell 6.9% YoY in January, and prices of manufactured imports was flat YoY, which was almost sufficient to offset a 21% YoY jump in prices of imports of resources (crude petroleum up 22.5% YoY, metal ores up 20.2%). However, it is difficult to miss that this improvement coincided with the depreciation of the lira.

Normally one would expect import prices to rise in the face of a depreciating national currency, whilst export prices would come under pressure from overseas customers suddenly aware of a greater room for price negotiation. In this case, the opposite seems to have happened. Assuming the data is correct, we must expect that in a few months we will be explaining the improvement of Oct-Jan terms of trade as an anomaly produced by the J-curve effect, in which the results of a currency depreciation are invisible or counter-intuitively positive in the very short term, only to be reversed in the medium term.