The Effects of the Investment Decline on Potential GDP in Turkey’s 2001 and 2009 Crises

Investment tends to fall dramatically in economic crises, which slows down the growth of the capital stock and thereby potential GDP. This note estimates the extent of such slowdown in the Turkish crises of 2001 and 2009. Capital growth fell significantly in both crises below its 1987-2011 average, but the fall in the 2001 crisis was deeper and much more persistent. The accumulated loss of capital arising from those two episodes of below-average growth is about 11% and 4% (of the trend level), respectively, in the 2001 and 2009 crises. The corresponding potential GDP losses are respectively about 6% and 2% of GDP. The loss in 2009, in addition to being smaller, was recovered much faster than in 2001. In the 4th year after the onset of the crisis, the 2009 crisis loss was recovered by about two-thirds, while the recovery of the 2001 crisis loss had barely begun in the 4th year. The limited nature of the loss in potential GDP in the 2009 crisis played a crucial role in ensuring that the ensuing rapid post-crisis recovery did not cause “overheating”.