How is Turkiye’s Growth Increasing While its Inflation is Soaring?

Turkiye's Minister of Treasury and Finance, Nureddin Nabati, said he expects monetary inflation in Turkiye to fall to single digits.

This comes as the government announced that inflation exceeded 80 percent, while unofficial data says real inflation exceeds 180 percent.

Minister of Treasury and Finance Noureddine Nabati said in a statement on Twitter that "the medium-term economic program that will form the road map for the next three years, was prepared in accordance with the principles of the eleventh development plan, by analyzing developments in the world and the Turkish economy accurately."

Nabati explained that during the preparation of the program, emphasis was placed on the model of the Turkish economy, which increases growth and employment, prioritizes high-value-added production, and is based on sustainable export-oriented growth.

One of the world's worst inflation crises has not derailed the Turkish economy so far, as the rise in consumer spending and tourism are pushing growth in Turkiye to be among the fastest in the G20.

According to a Bloomberg report on Wednesday, cheap money (low-interest loans) has given an additional boost to the Turkish economy, which has a GDP of $800 billion a year and has expanded at a rate of more than 6% each quarter since it came back to life with the easing of coronavirus lockdowns in 2020.

Although inflation has continued to rise this year to levels not seen in more than two decades, Turkiye's GDP rose 7.6 percent annually in the second quarter of this year, according to official figures, a slight increase from the previous three months, and from an average of 7.4 percent according to the forecasts of 18 economists who spoke to the agency.

 

Bartering Inflation

Faced with a trade-off between growth and inflation ahead of next year's parliamentary and presidential elections, Turkish President Recep Tayyip Erdogan has defended an economic model that prioritizes exports, production, and employment at the expense of price and currency stability.

Erdogan, an advocate of low-interest rates, relies on the resilience of households and businesses to deal with annual inflation, which is likely to peak at 80 percent as the lira falls to a record low.

Bloomberg believes that private consumption, which grew at a double rate during the year in the second quarter, and net exports, contributed about 3 percentage points to the annual growth of the Turkish economy.

The use of Turkish credit cards for shopping saw an increase of more than 112% in the April-June period compared to last year.

Turkish Treasury and Finance Minister Noureddine Nabati said in media statements that "we will not give up growth," adding that "when we do not give up on growth, the fight against inflation takes time."

This month's abrupt rate cut lifted the inflation index to around 79.6 percent, as well as rising energy prices globally, with Turkey importing most of its needs from abroad.

The tourism sector has also contributed to driving growth, with foreign arrivals and spending rising by more than 100% this year.

Turkish Trade Minister Mehmet Mus (read Mush) said that exports contributed 3.87 points to the growth of the country's economy in the second quarter of this year, adding that the contribution of net exports of goods and services to growth amounted to 2.7 points.

 

Risks to Growth

However, Turkiye's growth spurt may slow in the remaining two quarters of the year, with a separate survey of analysts this month suggesting that Turkiye's annual GDP growth could fall to 3.3 percent in the third quarter and 1.3 percent in the fourth quarter of the year.

Signs of a slowdown in industrial production and retail sales have already emerged, and the risk of a recession in Europe is of particular concern, as it is the main destination for Turkish exports.

Turkiye's central bank has already pointed to the "loss of some momentum" in the economy as a rationale for this month's rate cut, and analysts at ING Bank As have warned that "a high-risk premium in financial markets and increased macro-stability risks could affect domestic demand."

"We are seeing continued cost pressures, tighter global financial conditions, and a challenging domestic regulatory environment, putting pressure on the corporate sector," the bank's analysts said, noting that "there is a potential loss of momentum in exports given the slowdown in the eurozone."

Outside observers find it difficult to believe the narratives of the boom of Turkish business. Since 2018, the country has been suffering from a currency crisis after foreign investors abandoned Turkish bonds and stocks, leading to the devaluation of the Turkish lira.

Although inflation rose to 80 percent, the economy continued to function. In the lively areas of Istanbul, 1,100 kilometers west of Gaziantep by road, all indicators show a huge city where emerging markets thrive: noisy passengers, well-equipped shops, and busy roads.

The resilience of the Turkish economy is described by some as a mystery, especially given that it was among the few large economies that managed to grow in 2020.

Last year's GDP rose well by 11 percent, and recent figures show that industrial production rose 9.1 percent in the year to May. These indicators have surprised even seasoned entrepreneurs.

Turkiye is also an energy importer, specifically the gas supplied mostly by Russia and Iran. When energy prices rise, the trade balance deficit and the need for foreign capital increase

Other details from Turkey's second quarter GDP report

• Annual GDP grew to US$828 billion in the second quarter compared to US$793 billion during the previous three-month period.

Exports grew 16.4 percent year on year, and imports rose 5.8 percent.

• Government consumer spending increased by 2.3 percent from a year earlier.

Total fixed capital formation, a measure of investment by companies, rose at an annual rate of 4.7 percent.

• The share of labor compensation in GDP fell from 32.6 percent last year to 25.4 percent, and the labor union DSIC said the decline was driven by inflation and the COVID-19 pandemic.

The boom in the tourism sector has delivered another boost, with arrivals and spending by foreigners rising by more than 100 percent so far this year, and annual growth in services in the second quarter reaching 18.1 percent, according to data from the Turkish Statistical Institute.