(Bloomberg) — Turkey’s economy is likely to grow faster to start the year as consumers fuel an expansion that has so far been immune to a series of aggressive interest rate hikes aimed at stifling domestic demand.
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The economy’s engine malfunction has been a challenge, as many Turks brought forward their spending in anticipation of a currency slide after local elections in March. And with households expecting near triple-digit inflation by the end of the year, shoppers went ahead with purchases they would have made anyway, but perhaps at higher prices.
The result is what is perhaps a final burst before an economic cooling begins. Gross domestic product rose 5.8% annually in the first quarter, compared with 4% in the previous three months, according to the average forecast of analysts in a Bloomberg survey.
Friday’s data will also show GDP growth of up to 1.6% from the previous quarter when adjusted for working days and seasonal changes, according to another survey. Consumption accounts for more than half of Turkey’s $1.1 trillion economy.
The slowdown in domestic demand is still limited and aggregate demand remains stronger than supply, Garanti BBVA Research economists led by Seda Guler Mert said in a report.
Growth has barely dipped below 4% during a stretch when the central bank raised rates nearly sixfold to 50% in a tightening campaign that peaked at the end of the first quarter.
The relatively generous fiscal policy did not help to correct the demand for consumer goods and services, which is one of the main reasons why inflation is close to 75%.
With municipal elections approaching, for example, the government raised the minimum wage by 50% at the start of the year to offset the high cost of living, a decision officials say has been a major contributor to the resilience of household spending.
What Bloomberg Economics Says…
We attribute the increase in spending in the first quarter to expectations for a sharp currency slide after the March 31 vote. The lira fell by more than 20% against the dollar in the month after the May 2023 election. Households probably boosted consumption in 1Q24 amid fears of a similar hit to purchasing power after the March vote.
Selva Bahar Baziki, economist. Click here to read more.
Gauging the pulse of domestic demand is increasingly important to investors returning to Turkey’s debt market in bulk, lured by its high-yielding assets and the prospect of a major slowdown in inflation. But little evidence has emerged so far of a downturn in consumer sentiment.
Retail sales growth is hovering around 20% and consumer confidence is at its highest level in nearly a year. A survey of households this month by the Istanbul-based Koc University found that they expect inflation to end the year at 92%, more than double the central banks’ own forecast.
Easing inflation now depends on better coordination between monetary and fiscal policies, as well as President Recep Tayyip Erdogan’s patience if the economy turns around.
Long a champion and political beneficiary of free money, Erdogan abruptly reversed course a year ago and left a team of technocrats in control of the economy.
A stronger commitment to contain inflation should set the stage for measures such as stronger fiscal adjustments to narrow the budget deficit and avoid a temporary wage increase in the coming months.
The central bank expects a negative output gap where the economy is producing less than its long-term capacity to open up after next month, at which point the demand deficit should start to hold back inflation.
According to the minutes of this month’s rate collection, the latest indicators point to a slowdown in domestic demand compared to the first quarter. At the same time, policymakers said that the level of demand remains a risk factor for inflation.
What happens next is less clear. Economists at Goldman Sachs Group Inc. predict that a slowdown will occur in the second half to bring full-year growth to 2.8%.
The main risk to this outlook is a policy shift with the focus shifting from disinflation to maintaining growth momentum, they said in a report.
— With help from Joel Rinneby.
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