Domestic Demand in Turkey

Turkey - Domestic Demand

Economic growth beats expectations in Q2

The Turkish economy expanded 7.6% year on year in the second quarter. This came in above the first quarter’s 7.5% expansion and market analysts’ expectations of 7.5%.

The stronger growth reading was driven by a quicker expansion in private consumption (Q2: +22.5% yoy; Q1: +21.5% yoy). Household spending has been buoyed by demand for both goods and services amid deeply negative real interest rates driving fewer savings and fueling spending. An uptick in fixed investment expenditure growth (Q2: +4.7% yoy; Q1: +4.2% yoy) also provided support on the domestic side. On the other hand, government consumption increased at a softer clip of 2.3% in the second quarter, following the first quarter’s 3.1% expansion.

On the external front, exports of goods and services expanded 16.4% in the second quarter (Q1: +14.8% yoy), buoyed by a cheaper lira making Turkish goods exports more competitive and a strong influx of tourists in the period. Imports of goods and services, meanwhile, grew 5.8% in the period, after increasing 2.2% in the first quarter.

On a seasonally-adjusted quarter-on-quarter basis, economic growth rose to 2.1% in the second quarter from 0.7% in the first quarter. This signaled firming momentum, despite by red-hot inflation and depressed consumer sentiment.

Looking ahead, the balance of risks is clearly skewed to the downside. The lira has remained under pressure due to a hugely negative real interest rate, at a time when the U.S. Fed and ECB are stepping up the fight against inflation. Already elevated inflation has been stoked further by the fallout from the Russian invasion of Ukraine, which has sent commodity prices spiraling. Household spending will be impeded by evaporating disposable incomes; inflation is vastly outpacing the minimum wage increases at the start of the year. Moreover, the private sector’s debt overhang is mostly denominated in foreign currencies, posing macroeconomic stability risks. That said, still-robust business confidence and high capacity-utilization rates bode well for capital outlays. The removal of Covid-19 restrictions should support private consumption and the tourism sector.

Muhammet Mercan, chief Turkey economist at ING, added:

“We see momentum loss in activity in the second half of this year on the back of deteriorating purchasing power, concerns about policy sustainability, as well as a less supportive global backdrop with tightening global central bank policies and elevated geopolitical risks. Accordingly, we look for around 4.0% YoY growth this year.”

FocusEconomics Consensus Forecast panelists see GDP expanding 3.4% in 2022, which is unchanged from last month’s publication, and 3.6% in 2023.