Turkey Outdoes China With Growth Spurt Before Rate Hikes Kick In

(Bloomberg) -- Turkey’s economy expanded faster than China as it clocked one of the world’s quickest growth rates to start the year, in what’s probably a final spurt before a cooldown sets in following a series of aggressive interest-rate increases.

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Gross domestic product rose an annual 5.7% in the first quarter, slightly below the median forecast of analysts surveyed by Bloomberg but up from 4% in the prior three months. Data on Friday also showed GDP growth ticked up to 2.4% from the previous quarter when adjusted for working days and seasonal changes.

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. The economy’s resilience is largely due to household consumption, which grew 7.3% in annual terms.

“Private consumption has been the main driver of growth in the latest period,” said Haluk Burumcekci, an economist at Burumcekci Consultancy in Istanbul. The reading shows the lack of progress made to balance demand, he said.

Idling the consumer 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.

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%. Government spending was up 3.9% from the first quarter of last year.

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 expect the economy to feel the burn from the tighter policy cycle starting in the current quarter and carrying through to 2025. We expect high borrowing costs, coupled with a tighter fiscal stance, to reduce the 2024 annual growth rate to 3.2%.”

— 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. 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 ahead of the data release.

--With assistance from Joel Rinneby.

(Updates with economist comments, data breakdown, chart starting in third paragraph.)

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