Turkey Likely Had Last Consumer Burst Before Rate Hikes Kick In
(Bloomberg) -- Turkey’s economy likely grew faster to start the year, as consumers propel an expansion that’s so far been immune to a series of aggressive interest-rate increases meant to muffle domestic demand.
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Idling the engine of the economy has been a challenge because many Turks brought forward their spending in anticipation of a currency slump after local elections in March. And with households expecting inflation near triple digits by the end of the year, shoppers went ahead with purchases they would have made anyway but possibly at higher prices.
The result is what’s probably a final spurt before an economic cooldown sets in. Gross domestic product rose an annual 5.8% in the first quarter, compared with 4% in the prior three months, according to the median forecast of analysts in a Bloomberg poll.
Data due Friday will also show GDP growth ticked 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 lifted rates nearly sixfold to 50% — a tightening campaign that culminated at the end of the first quarter.
Relatively generous fiscal policy didn’t help corral demand for consumer goods and services that’s one of the main reasons why inflation is near 75%.
As the municipal elections approached, 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 key contributor to the resilience of household spending.
What Bloomberg Economics Says...
“We attribute the first-quarter surge in spending to expectations for a sharp slide in the currency after the March 31 vote. The lira was down by more than 20% against the dollar in the month after the May 2023 elections. Households probably front-loaded consumption to 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 who are returning to Turkey’s debt market in droves, enticed by its high-yielding assets and the prospect of a steep slowdown in inflation. But little evidence has so far emerged of a downturn in consumer mood.
Retail sales growth is hovering around 20% and consumer confidence is at the highest in nearly a year. A survey of households this month by Istanbul-based Koc University found they expect inflation to end the year at 92%, more than double the central bank’s own forecast.
Inflation relief now hinges on better coordination between monetary and fiscal policies — as well as President Recep Tayyip Erdogan’s patience if the economy goes into reverse.
Long a champion and a political beneficiary of cheap money, Erdogan abruptly shifted course a year ago and left a team of technocrats at the controls of the economy.
A stronger commitment to reining in inflation sets the stage for measures such as stronger fiscal adjustments to narrow the budget deficit and skipping an interim wage hike in the months ahead.
The central bank expects a negative output gap — where the economy is producing less than its long-term capacity — will open up after next month, the point at which a demand deficit should start to hold back inflation.
According to the minutes of this month’s rate meeting, “recent indicators point to a slowdown in domestic demand compared to the first quarter.” At the same time, policymakers said “the level of demand remained as a risk factor for inflation.”
What happens next is less clear. A tighter fiscal stance and the high cost of borrowing should start to restrain domestic demand and investment, putting the economy on track for “a low-3%” growth rate this year, compared with 4.5% in 2023, according to Bloomberg Economics.
Analysts at Goldman Sachs Group Inc. predict a slowdown will take hold in the second half to bring full-year growth to 2.8%.
“The main risk to this view is a policy reversal with the focus shifting from disinflation towards preserving growth momentum,” they said in a report.
--With assistance from Joel Rinneby.
(Updates with 2024 forecast from Bloomberg Economics in 16th paragraph.)
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