Turkey’s Economy Navigates Tightening Policies

Turkey’s economy, valued at $1.1 trillion, is poised to maintain growth momentum, avoiding a contraction despite a period of significant interest rate hikes by the central bank. The shift towards tighter monetary policy, initiated in June, has curbed consumption, a key driver of gross domestic product (GDP). While lending has slowed and retail sales growth remains subdued, policymakers aim to rein in inflation fuelled by years of loose monetary policy.

The central bank’s efforts to engineer a soft landing appear successful, with fourth-quarter GDP growth forecasted at 0.3%, adjusted for working days and seasonal changes, consistent with the previous quarter. Although some analysts, including Goldman Sachs, anticipate a slight contraction, the majority expect stability. On an annual basis, GDP growth is projected to decline to 3.5% from 5.9% in the third quarter, indicating a loss of economic momentum.

Despite the slowdown, consumer spending remains resilient, buoyed by robust auto sales and increased credit card borrowing. However, economists caution that the economy may face risks from overheated domestic demand and a widening current account deficit. Newly appointed Governor Fatih Karahan has hinted at the possibility of further rate hikes to counteract potential surges in domestic demand.

While industrial production experienced a quarterly contraction, retail sales showed modest expansion, fuelled in part by heightened credit card spending ahead of local elections. Although activity is expected to recover in the first quarter, driven by election-related spending and wage increases, overall growth may remain subdued.

In summary, Turkey’s economy navigates a delicate balance between tightening monetary policies and sustaining growth, with policymakers monitoring consumption patterns and inflation dynamics closely to ensure a stable economic trajectory amidst evolving domestic and global challenges.