Cheap money has added an extra kick to the $800-billion economy that’s expanded at a clip of over 6% every quarter since it roared back to life with the easing of coronavirus lockdowns in 2020. 

Although inflation has kept climbing this year to levels unseen for over two decades, gross domestic product rose an annual 7.4% in the second quarter, a slight increase from the prior three months, according to the median forecast of 18 economists surveyed by Bloomberg. 

Data due Wednesday will also show GDP growth accelerated to 1.5% in seasonally and working-day adjusted terms, a separate poll found.

Facing a tradeoff between growth and inflation ahead of elections next year, President Recep Tayyip Erdogan has championed an economic model that prioritises exports, production and employment at the expense of price stability and the currency. 

Turkey’s longest-running leader – an advocate of low interest rates – is leaning on the resilience of households and companies in coping with annual inflation that will likely peak past 80% with the lira at a record low.

What Bloomberg Economics Says…

“Private consumption is likely to have grown by double-digits over the year in the second quarter, with households front-loading their purchases in response to the high inflation environment. In addition, net exports probably contributed about 3 percentage points to annual growth. Investment spending, however, is likely to show a decline.”

– Selva Bahar Baziki, economist.

Treasury and Finance Minister Nureddin Nebati, who has estimated that GDP growth quickened in the second quarter, said this month that “we are not compromising on growth”. Speaking in a televised interview, he said that “when we do not compromise on growth, combating inflation takes time”.

Rather than acting to put a brake on prices, central bank governor Sahap Kavcioglu has held back from monetary tightening since slashing rates by 500 basis points late last year. A shock rate cut this month took Turkey’s benchmark to nearly 67% below zero when adjusted for inflation, the world’s most negative policy rate.

Spending, tourism

The stimulus has heated up demand and lending in an economy where spending by households accounts for more than half of output. Turkish credit card use for shopping saw an increase of over 112% in the April-June period from last year, according to Interbank Card Centre data. 

Booming tourism has delivered another boost, with arrivals and spending by foreigners surging by well over 100% so far this year.

Turkey’s growth spurt may, however, be close to running its course. A separate survey of analysts this month indicated annual GDP growth may slip to 3.3% this quarter and 1.3% in the final three months of the year.

Signs of a slowdown have already emerged in industrial production and retail sales, with business conditions among Turkish manufacturers last month deteriorating the most since the first wave of the coronavirus pandemic.

The threat of a recession in Europe is especially a worry because it’s the main destination for Turkish exports. The central bank already pointed to “some loss of momentum” in the economy as the rationale for its rate cut this month.

The ultra-loose policies can also come back to haunt Turkey. Economists at ING Bank AS have warned that “a higher risk premium in financial markets and growing macro-stability risks could weigh on domestic demand,” according to a report.

“We’re seeing continued cost pressures, tighter global financial conditions, and a challenging local regulatory environment, putting pressure on the corporate sector,” ING analysts including Muhammet Mercan said. “There’s a likely loss of momentum in exports given the slowdown in the eurozone.” BM