ISTANBUL — Better-than-expected economic data this week signaled Turkey may be turning the page on a painful downturn that has left millions out of work and sparked a voter backlash against President Recep Tayyip Erdogan’s ruling party in nationwide municipal elections earlier this year.
On Tuesday, official data showed inflation had reached 15% in August — its lowest level in more than a year, beating a forecast of 15.5% in a Reuters survey. The easing was helped by declines in the prices of transportation, clothing and food, according to the state statistics agency.
Data released Monday revealed gross domestic product grew 1.2% in the second quarter, compared with the previous three months, while a Bloomberg poll had estimated just a 0.4% increase. Economic activity was helped by government spending and exports, the latter jumping 8% in that period, the agency said.
In year-on-year terms, the economy shrank 1.5% in the second quarter but should begin expanding again in the second half of the year from last year’s low base when output was especially weak, economists said. The news has eased concerns the $750 billion economy could suffer a “double-dip recession” with another contraction after a brief recession earlier this year.
“Turkey´s second-quarter GDP growth figure beat expectations again and a ‘W’ pattern — or re-entering recession — has been avoided,” Alvaro Ortiz Vidal-Abarca, chief economist for Turkey at BBVA Research, wrote in an email. “This data increases the likelihood of positive growth in 2019, given the strong positive effect from now onwards.”
The upbeat news suggests the country has moved past the worst of the economic turmoil unleashed by a currency crisis in August 2018, when fears about Erdogan’s economic and foreign policies prompted investors to flee Turkish markets. Opinion polls before the March 31 mayoral elections showed the economy was voters’ top concern and Erdogan’s party lost a string of seats, including in Istanbul and the capital Ankara.
“With our fight against inflation and our policies that prioritize healthy growth, we will achieve our year-end targets in all fields,” Finance Minister Berat Albayrak tweeted.
Turkey targets growth of 2.3% and inflation of 5% by the end of 2019. While those goals still appear elusive, this week’s set of data will make it easier for the central bank to cut interest rates at its next meeting on Sept. 12. Inflation is bound to be lower year-on-year because the rate in late 2018 had accelerated so sharply, including a 15-year high of 25% in October 2018.
Governor Murat Uysal slashed rates by a record 425 basis points at the last meeting in July, less than three weeks after he took up the post. His predecessor, Murat Cetinkaya, was unceremoniously dumped after keeping interest rates high to protect the lira, which has lost a third of its value since the start of 2018.
At the time, Erdogan told his party members that Cetinkaya, whose post is supposed to be independent from political influence, was sacked because he had defied orders to cut interest rates in order to reduce inflation, an unorthodox theory that counters the widely held position that higher interest is what reins in inflation.
Since then, the central bank’s chief economist and other senior officials have also been fired after Erdogan pledged to overhaul the bank. Greater presidential control over the economy is part of Erdogan’s efforts to fully consolidate power within his executive presidency.
Turkey joins other emerging markets, as well as the US Federal Reserve and the European Central Bank, in cutting rates to boost growth amid signs the global economy is slowing. But some investors worry that Turkey’s bank, pushed by Erdogan, may cut rates too quickly and be caught on the back foot if inflation remains stubborn in the coming months.
For now, slowing inflation is “a reflection, I think, of the depressed state of domestic demand. Firms just lack pricing power,” wrote Timothy Ash of BlueBay Asset Management in a research note.
“Erdogan is always a lucky politician — and the global easing cycle, plus lower oil and energy prices, which come with weaker global growth, are certainly helping out here,” Ash said.
Some analysts questioned the figures behind GDP data, according to the Financial Times. For example, the state statistics office figure showed household spending only slipped 1.1%, helping limit the second-quarter annual contraction, but other consumer data, including imports of consumption goods, would indicate that households are spending even less, they said. Other data, including rising unemployment, slower lending at banks and a current account surplus, all indicate a slowing economy.
Even the slowdown in inflation suggests consumers are spending less. Yet households are still finding new and unpleasant price increases. Late last week the government hiked natural gas prices for households by 15%, bringing the total increase over the past year to 54%. One Twitter user quipped that sweaters may not be enough to keep Turks warm — but at least the fall inflation could make them cheaper to buy.
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