Turkey is in anticipation of growth after the recovery
After a robust recovery in 2021, economic activity in Turkey is declining. Leading indicators such as consumer confidence and the PMI index signal a gradual slowdown of the economic growth.
Economic recovery after the pandemic
In 2021, the Turkish economy grew by 11%. This was facilitated by a high level of exports and high consumer spending.
Thanks to strong external demand, export of goods reached a record level in 2021. At the same time, Turkey has benefited from the disruption of the supply chain in Asia and the depreciation of the lira.
Domestic demand is supported by strong credit growth and is being stimulated by an expansionary monetary policy despite high inflation.
Employment has recovered pre-pandemic levels, supported by the recovery of the economic activity.
The income of the population grew by 50% due to the increase in the minimum wage. At the same time, prices continued to rise. This is primarily due to the loose monetary policy, rising commodity prices and the depreciation of the exchange rate. Therefore, real incomes began to fall, consumer spending to decline.
Impact of the Russian-Ukrainian conflict
Events in Ukraine led to a sharp rise in commodity prices. Taking into consideration Turkey's strong dependence on oil and gas imports, this has had a significant impact on rising costs and prices.
Half of all gas imports to Turkey come from Russia, oil imports from Russia account for about 30%.
More than 70% of grain imported to Turkey comes from Russia and Ukraine.
In addition, Russian and Ukrainian tourists have always been important for the Turkish hospitality sector, accounting for about 15% of total tourism revenue.
Monetary and fiscal policy
Since September 2021, the Central Bank has reduced the base rate by 5 percentage points and is expected to keep the discount rate at 14% in the near term.
Negative real interest rates affected investors’ confidence and led to a significant depreciation of the lira. This prompted the population to protect their savings by exchanging lira deposits for dollars and other hard currencies. As a result, bond yields soared and inflationary pressures increased even further.
Central bank interventions and administrative measures, including obligations for exporters to convert 40% of their foreign currency earnings into lira and exchange rate protection for lira bank deposits introduced in late 2021, helped to stabilize the exchange rate in the first months of 2022. But already in May, the lira weakened again.
Fiscal policy will remain unchanged over the forecast period. To mitigate rising energy prices, the government reduced the value-added tax on electricity used in homes and agricultural businesses and in 4 million households.
Forecasts: Economic growth slowdown
In the next two years, economic growth will slow down. The post-pandemic economic recovery and expansionary monetary and fiscal policies will support economic activity.
However, continued very high inflation will limit household purchasing power and uncertainty will dampen investment.
An accommodative monetary policy, coupled with high commodity and food prices, will keep consumer inflation above 70% in 2022.
Exports will remain robust as the shift of global supply chains out of Asia will help to offset some downward pressure from weaker growth in global demand.
The EU embargo on Russian oil will keep oil prices high, resulting in high consumer price inflation that will remain significantly elevated in the coming years.
The adverse consequences of military operations in Ukraine could become much more significant, especially due to commodity prices.
A complete cessation of energy exports from Russia to Europe, higher costs associated with shortages of critical raw materials, or further disruptions to transportation and trade could have significant negative effects on the economy.
Further pressure on the lira could turn exchange rate protection on deposits into an additional liability for public finances, hurting inflation and confidence. These risks are exacerbated by an increase in contingent liabilities built up in recent years, despite a relatively low public debt-to-GDP ratio compared to other OECD countries and a robust banking sector.