Economy grows 7.6% despite 24-year-high inflation in this Middle-Eastern country

Despite inflation reaching a 24-year high in the second quarter, Turkey's economy outperformed most of its competitors because of a spike in consumer spending. In the second quarter, the gross domestic product increased annually by 7.6%, exceeding the consensus prediction of 7.4% in a Bloomberg survey of 18 economists. In seasonally and working-day adjusted terms, the quarterly GDP growth advanced to 2.1%.

Ahead of elections in 2023, President Recep Tayyip Erdogan has advocated an economic model that puts exports, output, and employment ahead of price stability and currency in order to balance growth and inflation.

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The longest-serving leader of Turkey, who supports low interest rates, is relying on the ability of individuals and businesses to deal with yearly inflation, which is expected to reach a record high with the lira at a record low. Annual inflation will likely peak at above 80%.

Treasury and Finance Minister Nureddin Nebati earlier said, “We are not compromising on growth. When we do not compromise on growth, combating inflation takes time.”

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Sahap Kavcioglu, the governor of the Central bank, has refrained from tightening the money supply after cutting interest rates by 500 basis points in late 2021 instead of taking action to restrain prices. Turkey's benchmark rate, which is the most negative policy rate in the whole world, is now about 67% below zero thanks to a surprise rate drop this month.

Key takeaways

A significant driver of growth, household consumption increased by 22.5% from a year ago. Gross fixed capital formation, a gauge of business investment, increased annually by 4.7%. In the second quarter, annual GDP increased to $828 billion from $793 billion in the preceding three months.

The annual rise in exports was 16.4%. The imports went up by 5.8%. From a year ago, government consumption spending increased by 2.3%.

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In an economy where household spending makes up more than half of output, the monetary stimulus has heated up lending and demand. Over 112% more Turkish people than in 2021 used credit cards for purchasing during the months of April and June.

Another benefit has come from booming tourism, with international visitor arrivals and expenditure up more than 100% so far this year. According to Turkstat figures, annual growth in the services sector was 18.1% in the second quarter.

However, Turkey's growth boom might be nearing its end. The annual GDP growth may slow to 3.3% this quarter and 1.3% in the last three months of the year, according to a separate survey of economists conducted in August.

(With agency inputs)