Turkey’s economy lurched forward at a faster rate than expected, as the highest inflation in 24 years prompted consumers to bring forward purchases in anticipation of steeper prices ahead. Gross domestic product rose an annual 7.6% in the second quarter, up from a revised 7.5% gain in the previous three months and slightly above the median estimate in a Bloomberg survey of economists. Quarterly GDP growth accelerated to 2.1% in seasonally and working-day adjusted terms, faster than any forecast in another poll of analysts.
Booming domestic demand, alongside exports, was the main driver of the economy, helping offset stagnating growth in investment. Household consumption expanded 22.5% from a year earlier, according to data published on Wednesday. Although the upswing may be short-lived, with a slowdown expected already this quarter, the acceleration has made Turkey’s $800 billion economy among the fastest-growing in the Group of 20. Facing a trade-off between growth and inflation ahead of elections next year, President Recep Tayyip Erdogan has championed an economic model that prioritizes exports, production and employment at the expense of price stability and the currency.
Turkey’s longest-running leader -- an advocate of low interest rates -- is leaning on the resilience of households and companies in coping with annual price growth that will likely peak past 80% with the lira at a record low. In an effort to inflation-proof consumer spending, the government in July announced an interim increase in the minimum wage for the first time in six years, raising pay by nearly 30%. Turkey already boosted its minimum wage by a record 50.5% in January.
Treasury and Finance Minister Nureddin Nebati said this month that “we are not compromising on growth.” Speaking in a televised interview, he added “when we do not compromise on growth, combating inflation takes time.”
Inflationary Growth
The worry is that the efforts will backfire by touching off cost pressures, and inflation will eventually take a toll on consumers. Gizem Oztok Altinsac, chief economist at the Turkish business association Tusiad, said on Twitter that “investments are weak and as such, growth is inflationary.”
Rather than acting to put a brake on prices, central bank Governor Sahap Kavcioglu has held back from monetary tightening since slashing rates by 500 basis points late last year. A shock rate cut this month took Turkey’s benchmark to nearly 67% below zero when adjusted for inflation, the world’s most negative policy rate.
The monetary stimulus has supported demand and lending in an economy where spending by households accounts for more than half of output. Turkish credit card use for shopping saw an increase of over 112% in the April-June period from last year, according to Interbank Card Center data.
Booming tourism has delivered another boost, with arrivals and spending by foreigners surging by well over 100% so far this year. Annual growth in services in the second quarter was 18.1%, according to Turkstat data.
Turkey’s growth spurt may, however, be close to running its course. A separate survey of analysts this month indicated annual GDP growth may slip to 3.3% this quarter and 1.3% in the final three months of the year.
Signs of a slowdown have already emerged in industrial production and retail sales, with business conditions among Turkish manufacturers last month deteriorating the most since the first wave of the coronavirus pandemic.
‘Loss of Momentum’
The threat of a recession in Europe is especially a worry because it’s the main destination for Turkish exports. The central bank already pointed to “some loss of momentum” in the economy as the rationale for its rate cut this month. The ultra-loose policies can also come back to haunt Turkey. Economists at ING Bank AS have warned that “a higher risk premium in financial markets and growing macro-stability risks could weigh on domestic demand,” according to a report. “Second-quarter GDP reflected strong consumption demand and continuing support from external demand,” said Muhammet Mercan, ING’s chief economist for Turkey. “However, we see momentum loss in activity in the second half of this year on the back of deteriorating purchasing power and a less supportive global backdrop.”
