Turkey's Economy in Worse Condition Than Expected, Bloomberg Reports

Turkey's economy is in worse condition than anticipated, as it has progressed at the slowest pace since the peak of the pandemic in 2020, which could concern President Recep Tayyip Erdoğan ahead of next year's elections, Bloomberg reported.

Latest data shows that GDP grew by 3.9 percent year-on-year in the third quarter, one of the best results in the G20, but significantly lower than the forecasts of most economists surveyed by Bloomberg. This marks a sharp decline compared to the previous three months when GDP had increased by 7.7 percent.

In August, the central bank shocked markets by recalibrating the refinancing rate, and an unorthodox approach has fueled inflation affecting the economy. GDP decreased by 0.1 percent in the third quarter compared to the previous three months.

Erdoğan, who needs to be re-elected next year, defends an economic model that prioritizes exports, production, and employment at the expense of price stability and the currency. The president has pressured the central bank to reduce interest rates to single digits, a goal that was achieved during last week's meeting when the rate was set at 9 percent.

In comments on Twitter, Finance Minister Nureddin Nebati stated that Turkey's approach would pay off, promising that the government would remain committed to its “employment-focused policies.” However, four consecutive interest rate cuts have not provided a specific boost to an economy with an $800 billion turnover. Businesses and consumers are feeling the destructive impact of inflation following a post-pandemic recovery when Turkey's economic growth had surpassed 6 percent over two years.

“Even with a slowdown in growth, inflation remains a serious issue for the economy. The central bank's weak position in monetary policy reflects on the currency and inflation. We see that expansionary policies ahead of the 2023 elections are driving demand and price increases,” noted economist Selva Bahar Baziki.

According to Erkin Işık, chief economist at QNB Finansbank in Istanbul, one of the most restraining factors for growth in the third quarter has been investment, measured by capital accumulation.

The depreciation of the lira is one of the reasons for a year-on-year price growth approaching 86 percent. The Turkish currency, which declined by about 10 percent against the dollar in the third quarter, has hardly changed since the data release.

Household finances are under pressure, and consumer spending has remained relatively stable to support the economy, anticipating that inflation will “eat away” their income.

Erdoğan's aim of boosting the economy through export growth is also under threat, as the risk of recession hangs over Europe, its largest trading partner. In a disappointing fourth quarter, exports of Turkish goods abroad increased by only 3 percent in October, down from more than 9 percent the previous month.

This is a sign that Turkey's ability to maintain growth in the coming months will depend on stronger domestic demand and business investments. The government will likely consider various measures to invigorate the economy ahead of elections scheduled for June. A long-awaited increase in the minimum wage, expected to be announced in December, could provide households with an additional “breath” against inflation.