Executive Summary
Real GDP in Turkey grew at a stronger pace in 2013 than it did during the preceding year. That said, momentum in the Turkish economy remains slow relative to the supercharged growth rates that were registered during the boom years of 2003-2007, and most analysts look for deceleration in economic activity in 2014. The central bank tightened policy significantly in response to the sharp depreciation of the Turkish lira earlier this year, and higher interest rates will likely weigh on growth in consumer durables and fixed investment spending this year.
Turkey’s gaping current account deficit, which reflects a shortfall of its national savings relative to its investment, makes the country vulnerable to exogenous shocks. Current account deficits need to be financed by capital inflows from abroad, and capital flows can reverse quickly when investors turn risk averse. Although the depreciation of the lira should aid the adjustment process, the current account deficit likely will not disappear anytime soon. In other words, the Turkish economy and the value of the Turkish lira likely will remain vulnerable to downside shocks for the foreseeable future.
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