Solid Growth in Turkey in Q1 but Challenges Remain

Executive Summary

Real GDP growth in Turkey was solid in Q1, topping analyst estimates on a sequential basis and bringing year-over-year economic growth up to 7.4 percent. The underlying details suggest strong domestic demand and healthy momentum heading into Q2. However, subsequent developments have altered the outlook. On May 14, Turkish President Erdogan made comments in an interview that appeared to call into question the independence of the Turkish central bank. The Turkish lira, which was under pressure even before the interview, fell significantly in the ensuing weeks.

The central bank’s recent moves to counter the lira’s decline have helped calm markets, and the national elections that take place on June 24 will be key to the near-term outlook for financial markets. Regardless, the steep slide in the lira is likely to lead to faster inflation and slower growth in purchasing power for consumers, and tightening by the central bank will be a headwind to interest rate sensitive spending. As a result, economic growth in Turkey may slow in the second half of the year. Taking a longer-term view, the confluence of higher oil prices, elevated political risk and rising global interest rates suggest the underlying challenges associated with a gaping current account deficit are unlikely to abate anytime soon. 

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