Turkey’s Economy Outperformed Most Peers But at a Cost

Turkey’s economy has continued to grow at a strong pace this year, an expansion that’s come at the expense of price and currency stability.

The economy outperformed all Group of 20 nations except for China in the first quarter after nearly stalling a year ago when the pandemic struck. It’s been bolstered by robust consumption on the back of last year’s government-led push to cut interest rates and boost lending.

Gross domestic product rose 7% from a year earlier and 1.7% from the fourth quarter. The median of 22 forecasts in a Bloomberg survey was for 6.3% growth compared to the same period in 2020.

Below are some of the highlights of the GDP report released by the state statistics institute in Ankara on Monday:

  • Household consumption — estimated to account for about two-thirds of the economy — continues to be one of the main drivers of growth. It jumped 7.4% from a year earlier.
  • The size of the economy grew to $728.5 billion in the first quarter from $717 billion in current prices last year.
  • Exports rose 3.3% on an annual basis. Imports dropped 1.1%.
  • Gross fixed capital formation, a measure of investment by businesses, rose an annual 11.4%. Government spending rose 1.3% after a 6.6% jump in the previous quarter.
  • The economy grew by 1.7% in the last quarter from the previous three months when adjusted for seasonality and the number of working days. Overall output rose 1.8% in 2020.

There is an “exchange rate illusion” in Turkey’s economic growth data, according to Enver Erkan, chief economist at Istanbul-based Tera Yatirim. Noting that the GDP per capita in U.S. dollar terms dropped nearly 40% since 2013 to around $7,700 last year, Erkan said Turkey’s recent economic model isn’t sustainable as the growth is mainly driven by consumption supported by government spending and loan campaigns.

“This comes at the expense of lira and price stability,” he said.

The government pushed banks to ramp up lending to help businesses and consumers ride out last year’s Covid-19 emergency. The credit boom was coupled with a front-loaded easing cycle. That growth push weakened the currency by 20% last year and kept headline inflation in double digits.

The currency losta further 10% against the dollar in the first quarter, especially after President Recep Tayyip Erdogan fired the central bank’s former hawkish governor Naci Agbal in March. The decision to fire Agbal, who had sought to restore the central bank’s credibility, set off a swift reversal of investor enthusiasm, sending Turkish markets into a nosedive.

There may be a limited drop in the pace of growth in the second quarter, according to Istanbul-based economist Haluk Burumcekci. “Uncertainties regarding the monetary policy makes it difficult to assess the upside risks on our growth expectation of 5.5% for 2021,” he said.

The data expose the challenge facing new central bank Governor Sahap Kavcioglu as he looks to restore price stability without cooling the economy ahead of the general elections in 2023.

Kavcioglu has pledged policy continuity after his appointment and kept benchmark interest rate unchanged at 19% for a second meeting this month, saying the pace of price gains had peaked in April. Consumer inflation quickened for a seventh month to 17.14% in April.

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