Turkish spending boom fuels strong expansion of economy

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Turkey’s economy grew more than expected in the second quarter, powered by higher consumer demand and government spending ahead of a May election, but analysts warned that tighter monetary policies would probably slow growth over the rest of the year.

Gross domestic product rose 3.8 per cent between April and June on an annual basis, according to the state statistics agency, outpacing analysts’ projections of 3.1 per cent in a Bloomberg survey.

Ahead of the May vote, President Recep Tayyip Erdoğan boosted stimulus spending, including lowering the retirement age and distributing free gas supplies, to shore up voter support. He also kept interest rates in the single digits to encourage spending but has since allowed rates to rise in an effort to tame soaring inflation.

Household consumption leapt 15.6 per cent in the second quarter, while public spending grew 5.1 per cent, Thursday’s data showed. Construction expanded 6.2 per cent as Turkey began a huge rebuilding effort in the wake of a devastating earthquake in February that killed more than 50,000 people and destroyed hundreds of thousands of buildings. 

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“Our economy continued its strong growth performance in the second quarter when we tried to compensate for the economic effects of the earthquake,” said Mehmet Şimşek, who became finance minister after the election. “Our goal is for growth to be strong, but also balanced, sustainable and inclusive.”

After his re-election victory, Erdoğan appointed Şimşek and another former Wall Street banker, Hafize Gaye Erkan, as central bank governor, signalling a return to mainstream economic policies. He has permitted Erkan to raise interest rates by 16.5 percentage points to 25 per cent to tame runaway inflation that has unleashed a painful cost of living crisis.

However, Turkish inflation ended an eight-month decline in July as annual inflation rose to almost 50 per cent, illustrating the difficulties for Turkish monetary policymakers seeking to slow price growth in an overheating economy. 

Several economists expect the central bank to continue increasing the cost of borrowing this year, a move that is likely to slow, or even halt, economic growth. Goldman Sachs said last week it expected Turkey to slip into a recession this year.

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Weaker global demand led to Turkish exports falling 9 per cent in the second quarter, the data showed. Declines in manufacturing output and consumer confidence suggested domestic activity might also be slowing, Haluk Bürümcekçi, economist at Bürümcekçi Research & Consulting, said in a note to clients. 

“The initial signals indicate a weakening of GDP growth in the third quarter,” he said. “The impact of tax hikes, macroprudential measures targeting consumer loans and credit cards and the slowdown in credit growth due to rising credit interest rates can all . . . curb domestic demand.”

But Erdoğan may still press his economic team to support rapid growth in the run-up to next year’s municipal elections. He has said he is determined to help the ruling party win back Istanbul, the country’s economic engine, from the opposition.

Source: https://www.ft.com/content/00ecff8f-7f90-4de8-ba3e-7909a50eee2f