Turkey’s economy probably slowed in the second quarter, with activity set to remain subdued for the rest of the year as officials seek to put growth on a more sustainable footing by raising interest rates.
Gross domestic product likely expanded 3.1% year-on-year, according to the median forecast in a Bloomberg survey of analysts, the weakest level since the Covid-19 pandemic and down from 4% between January and March.
Growth was probably 2.3% higher quarter-on-quarter in seasonally and working-day adjusted terms, as household consumption remained strong through May thanks to heavy pre-election spending by President Recep Tayyip Erdogan.
Some analysts believe that spending was enough to boost growth in year-on-year terms in the quarter. The estimates in the survey ranged from 1.2% to as high as 5.3%.
Erdogan, who won reelection to take his rule into a third decade, has since signaled a shift away from unorthodox policies — including ultra-low borrowing costs — that he championed in recent years but which caused foreign investors to flee the $900 billion economy.
The president’s new economic team, led by Finance Minister Mehmet Simsek and central bank Governor Hafize Gaye Erkan, is trying to slow inflation of almost 50%, which has inflicted a severe cost-of-living crisis on Turks.
Still, Erdogan may encourage them to strike a balance and boost growth ahead of local elections in March. The president wants to recapture the mayor’s seat in Istanbul after suffering a stinging defeat there four years ago.
Leading indicators, including retail sales, suggested consumption remained strong in the second quarter, though industrial and export sectors slowed. Industrial production still shows limited recovery from February’s devastating earthquakes.
On Monday, Simsek signaled there’ll be little improvement this year.
“Disinflation and structural change in the economy will speed up,” he said in a post on social media platform X, formerly known as Twitter.
Goldman Sachs Group Inc. forecasts that Turkey will enter a recession in the second half of 2023.
“Policy, both monetary and fiscal, has shifted significantly tighter,” Goldman analysts including Clemens Grafe said in a note last week.
What Bloomberg Economics Say
We expect Turkey’s 2Q23 GDP announcement to show that economic activity has slowed down slightly, even as it was supported by elections-related spending through May. We see fiscal stimulus taking a step down in 3Q23, while domestic demand is likely to remain strong even as price gains are projected to pick up through the rest of the year.
— Selva Bahar Baziki, economist. Click here to read more.
That shift gained impetus last week when the central bank hiked interest rates by 750 basis points, far more than expected. Turkish bonds and the lira to rally afterwards.
Supersized Rate Hike Spurs Massive Rally Across Turkish Markets
The monetary authority also said it could seek to curb consumption.
The “strong course of domestic demand is one of the main drivers in the underlying trend of inflation,” the bank said in a statement after the rate increase.
“We expect the monetary tightening will limit the domestic demand growth,” said Deniz Cicek, an economist from QNB Finansbank. “Depending on the global outlook, we also see export growth as limited, adding to the factors that will bring the quarterly growth trend lower.”
--With assistance from Selcan Hacaoglu, Harumi Ichikura and Joel Rinneby.