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Final spurt before rate hikes bite? Turkey outpaces China in 1st quarter growth

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Turkey’s economy experienced a rapid surge in growth in the first quarter of the year, outpacing China with one of the world’s fastest growth rates, although it is likely to be short-lived as the impact of aggressive interest-rate increases in the past year is expected to cool down the economy in the coming months, Bloomberg reported on Friday.

Gross domestic product (GDP) rose by an annual 5.7 percent in the first quarter, slightly below Bloomberg analysts’ median forecast but up from 4 percent in the previous three months. Adjusted for working days and seasonal changes, GDP growth increased to 2.4 percent from the previous quarter.

Despite the central bank raising rates nearly sixfold to 50 percent by the end of the first quarter, growth remained resilient, largely driven by household consumption, which grew by 7.3 percent annually.

“Private consumption has been the main driver of growth in the latest period,” Bloomberg quoted Haluk Bürümcekçi, an economist at Burumcekci Consultancy in İstanbul, as saying. However, he noted that there has been little progress in balancing demand.

Many Turks accelerated their spending in anticipation of a currency slump following local elections in March. With inflation expected to reach near triple digits by year-end, households made purchases sooner, anticipating higher future prices.

Generous fiscal policies also fueled consumer demand, contributing to inflation near 75 percent. Government spending rose by 3.9 percent from the first quarter of last year. Ahead of municipal elections, the government raised the minimum wage by 50 percent to mitigate the high cost of living, bolstering household spending.

“We expect the economy to feel the burn from the tighter policy cycle starting in the current quarter and carrying through to 2025. We expect high borrowing costs, coupled with a tighter fiscal stance, to reduce the 2024 annual growth rate to 3.2 percent,” Bloomberg quoted economist Selva Bahar Baziki as saying.

Despite these measures, retail sales growth is around 20 percent, and consumer confidence is at its highest in nearly a year. A survey by İstanbul-based Koc University found households expect inflation to end the year at 92 percent, more than double the central bank’s forecast.

Inflation relief now depends on better coordination between monetary and fiscal policies and President Recep Tayyip Erdoğan’s patience if the economy slows down. Erdoğan, who has long favored cheap money, shifted course a year ago, leaving technocrats to manage the economy.

To curb inflation, the government may implement stronger fiscal adjustments and avoid interim wage hikes. The central bank anticipates a negative output gap—where the economy produces less than its capacity—will open after next month, reducing inflation pressures.

Minutes from this month’s rate meeting indicated a slowdown in domestic demand compared to the first quarter, although demand levels remain a risk factor for inflation, Bloomberg reported, adding that analysts at Goldman Sachs predict a slowdown in the second half of the year, bringing full-year growth to 2.8 percent.

“The main risk to this view is a policy reversal with the focus shifting from disinflation towards preserving growth momentum,” they said in a report.

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