Although Turkey's economic growth rates displayed a strong outlook in the first half of the year, the 3Q22 period will show that the previous period's path has slowed down, but that a relatively strong growth performance can be maintained. The growth rates of the Turkish economy seem to draw a stronger profile than before Covid. In an environment where a strong tourism season was supportive in terms of resource inflows, private consumption came to the fore due to inflation and net exports continued to make a positive contribution, a growth path of over 7.5% was reached in the 1H22 period. Although tourism and service activities make a positive contribution by benefiting from seasonal conditions, we calculate that the slowdown effect on the industry and export side will be partially seen in the 3Q22 period.
In this context, we expect annual growth to slow down partially from 7.6% in 2Q22 and reach 4.8% in 3Q22. This will also be in line with the long-term average growth path of the Turkish economy.
Comparison of real GDP growth rate (seasonally and calendar adjusted) and long-term growth path… (Chain volume index has been normalized with Factor 100 based on 1Q19, which is the beginning of the pandemic.) Source: Bloomberg, TURKSTAT, Tera Yatırım
In this environment, we want to focus primarily on the domestic demand channel. The high inflation environment has created a significant demand shift in consumer behavior, and this has brought the desire to buy on the private consumption side to the fore due to the ever-increasing prices. However, high and widespread inflation significantly erodes the real disposable income of individuals and this negatively affects their demand ability. We can see the slowdown in domestic demand due to inflation on the private consumption side. Because those in need will occupy more space in personal expenditures and the effect of decreasing real income will reduce the share of discretionary expenditures. Within the scope of macro precautionary measures to limit consumption, economic policies aimed at reducing the current account deficit will limit consumer behavior over time and slow down the contribution of this channel to growth.
Economic institutions have recently taken some macroprudential measures to direct loans to commercial investments. Factors such as unstable demand environment, unpredictable production costs, logistics problems have pushed companies to think short-term, and therefore the trend in production and capacity may remain limited. The global recession environment will not be a positive situation in terms of investment tendencies of companies, it is highly likely that the situation will turn to stock management and working capital protection. For this reason, we foresee a decreasing contribution in investments during and after the current period.
The slowing demand in Turkey's main export markets will limit export performance. The decrease in the contribution of foreign demand and net exports may cause a slowdown in economic growth. We do not expect a positive external economic performance due to the expected recession wave, especially in Europe, our main trading partner.
Despite the inflation rising to 85.5%, the Central Bank of the Republic of Turkey lowered the interest rates by 500 basis points in total in the second phase of the 2021/22 model easing cycle in order to support growth. This is expected to erode the lira further under normal circumstances, but exchange rates have been fairly stable for the past few months. This unconventional method may seem good in the sense that there is no extra negative effect on inflation from the exchange rate, and if the real effective exchange rate increase becomes continuous in the last period, it may affect the status of exports. Even if the exchange rate increases, import costs, especially fuel, will increase and the increased costs will cause more inflation. In an inflationary environment, it is difficult to maintain a sustainable growth balance, and private consumption suffers first and foremost.
If the effect of foreign currency inflows to the economy decreases, it may affect the increase in exchange rate and inflation in an environment where interest rates are kept low. Loose monetary policy and expansionary fiscal policy can prevent a technical recession in Turkey. As a side effect of growth-oriented policies, high inflation pressure may continue to be the primary problem. We see high inflation conditions as problematic in terms of growth and think that it is not sustainable and will be detrimental to growth due to the income erosion and unstable investment environment it creates. In the light of all these data, we foresee the GDP growth as 5.5% for the whole of 2022 and predict that the growth will slow down to 2.8% in 2023.
Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı
