Turkey’s economy grew rapidly in the first quarter of this year, surpassing China as the world’s fastest-growing economy, but that growth is unlikely to last as aggressive interest rate hikes over the past year are expected to cool the economy in the coming months, Bloomberg reported on Friday.
Gross domestic product rose 5.7% in the first quarter from a year earlier, slightly below the median estimate of analysts surveyed by Bloomberg but up from 4% in the previous quarter. Adjusted for business days and seasonal fluctuations, GDP growth rose to 2.4% from the previous quarter.
Growth remained solid, driven mainly by a 7.3% annual increase in household consumption, despite the central bank raising interest rates nearly sixfold to 50% by the end of the first quarter.
“Private consumption has been the main driver of growth in recent times,” Bloomberg quoted Haluk Burumcekci, an economist at Burumcekci Consultancy in Istanbul, as saying, but he noted little progress has been made in balancing demand.
Many Turks have accelerated their spending in anticipation of a weaker currency following local elections in March, and with inflation expected to reach nearly triple digits by the end of the year, households have accelerated purchases in anticipation of future price increases.
Generous fiscal policy also spurred consumer demand, pushing inflation to nearly 75%. Government spending rose 3.9% from the first quarter of last year. Ahead of municipal elections, the government raised the minimum wage by 50% to ease the soaring cost of living, boosting household spending.
“We expect the economy to take a hit from a tightening policy cycle that will begin this quarter and continue through 2025. We expect annual growth to slow to 3.2% in 2024 due to higher borrowing costs and fiscal tightening,” Bloomberg quoted economist Selva Bahar Bajki as saying.
Despite the measures, retail sales are growing at about 20 percent and consumer confidence is at its highest in nearly a year. A survey by Istanbul’s Koc University found that households expect inflation to reach 92 percent by the end of the year, more than double the central bank’s forecast.
Reducing inflation will depend on better coordination between monetary and fiscal policies and the patience of President Recep Tayyip Erdogan, who long supported low interest rates but reversed course a year ago to hand economic management to technocrats.
To curb inflation, the government may tighten fiscal adjustments and avoid temporary wage hikes.The central bank expects a negative output gap, where the economy is operating below capacity, to open up from next month, easing inflationary pressures.
Minutes from this month’s interest rate meeting showed domestic demand slowing compared to the first quarter, although demand levels remain a risk to inflation, Bloomberg reported, adding that Goldman Sachs analysts now expect a slowdown in the second half of the year, leading to full-year growth of 2.8%.
“The main risk to this view is a shift in policy, with the emphasis shifting from deflation to maintaining growth momentum,” they said in the report.
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