Turkish Economy Grows 7.6% Despite Fastest Inflation in Decades

(Bloomberg) -- Turkey’s economy outpaced most peers in the second quarter despite inflation at a 24-year high, driven by a surge in consumption.

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Gross domestic product rose an annual 7.6% in the second quarter, above the median forecast of 7.4% in a Bloomberg survey of 18 economists.

Quarterly GDP growth accelerated to 2.1% in seasonally and working-day adjusted terms.

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 inflation that will likely peak past 80% with the lira at a record low.

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.”

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.

Key insights

Household consumption, a major contributor to growth, rose 22.5% from a year earlier. Gross fixed capital formation, a measure of investment by businesses, rose an annual 4.7%

Annual GDP grew to $828 billion in the second quarter from $793 billion through the previous three-month period.

Exports increased 16.4% on an annual basis. Imports increased by 5.8%.

Government consumption spending rose 2.3% from a year earlier.

Spending, Tourism

The monetary stimulus has heated up 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.

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.

“We’re seeing continued cost pressures, tighter global financial conditions, and a challenging local regulatory environment, putting pressure on the corporate sector,” ING analysts including Muhammet Mercan said. “There’s a likely loss of momentum in exports given the slowdown in the eurozone.”

©2022 Bloomberg L.P.