Turkey: Pre-Covid growth levels exceeded

Although Turkey’s economic growth rates displayed a strong outlook in the first half of the year, we consider that the main issue is related to the determinants of growth as well as the economic perspective that puts growth forward. In the remaining 1H22 period, the growth rates of the Turkish economy seem to draw a strong profile when compared to the pre-Covid period, which has already been demonstrated by the leading indicators of growth. In an environment where a strong tourism season is supportive in terms of resource inflows to the economy, private consumption is brought forward due to inflation and net exports are still making a positive contribution, it seems that there will be a growth rate that approaches or even catches the 7.3% growth rate in 1Q22.

In this environment, we would like to focus on the domestic demand channel first. The high inflation environment has created a significant demand shift in consumer behavior and we observe that this has brought the willingness to buy to the forefront on the private consumption side due to constantly rising prices. The continuous increase in inflation expectations may ensure that the domestic demand channel is effective in the short term, as long as expenditures can be made through savings and borrowing. However, within the scope of macro precautionary measures aimed at limiting 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. Even without these restrictive macroprudential measures, inflation is also increasing in the Turkish economy, which recorded a growth profile well above the pre-Covid trend. We do not find this concept sustainable and we think that increasing inflation will harm domestic demand.

Private consumption is likely to grow in double digits throughout the year due to front-loading purchases by households in a high inflation environment. We will receive a decreasing contribution from the investment item. The financing opportunities that we have just mentioned, oriented towards consumption, do not show the same orientation on the side of capital investments. Economic institutions have recently taken some macroprudential measures aimed at directing loans to commercial investments. Factors such as unstable demand environment, unpredictable production costs, logistical problems have pushed companies to think short-term, and the trend in production and capacity may therefore be limited. The global recession environment will not be a positive situation in terms of investment trends of companies, and it is highly likely that the situation will shift to inventory management and working capital protection. Therefore, we anticipate a decreasing contribution to investments in 2Q22 and beyond.

Contribution of net exports to growth will continue in terms of 2Q22 due to the ongoing export growth and EUR/USD parity differences. We do not foresee the same situation for the second half of the year. Slowing consumption in Turkey’s main export markets will have a limiting effect on export performance. Due to Turkey’s economic structure, our export revenues are in Euros and our import costs are in dollars. Therefore, the situation in parity negatively affects us by reducing the value of our income and increasing the value of our expenses. The decrease in the contribution of foreign demand and net exports may cause a slowdown in economic growth. In the medium and long term, we will see the effects of feasibility studies within the scope of the new economic model, which includes an export-based growth strategy. In this context, we consider value-added high-tech production and market diversification to be of critical importance.

Despite the signs of inflation rising to 79.6% and rising even more, the Central Bank lowered the policy rate one notch to 13% in August. The actions of the bank seem to give priority to growth rather than price stability, but we see high inflation conditions as problematic for 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. The decrease in the effect of foreign exchange inflow in the economy may affect the increase in exchange rate and inflation in an environment where interest rates are kept low. Looking ahead, we expect 2022 growth to slow to 4.1% compared to 11% last year.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı