Turkey’s economic growth slows to 3.9% in Q3 as foreign demand falls
People shop at a local market in Fatih district in Istanbul, Turkey. Reuters
Gross domestic product (GDP) contracted 0.1 per cent from the previous quarter on a seasonally and calendar-adjusted basis, data from the Turkish Statistical Institute showed, marking the first contraction since the height of the COVID-19 pandemic in the second quarter of 2020.
Economists expect full-year growth of 5 per cent, in line with forecasts, according to the latest Reuters poll, after a strong first half of the year.
Economists expect growth to slow further in Q4.
“It seems it is still possible to attain the 5 per cent growth target if there is no quarterly contraction of more than 0.5 per cent in Q4,” Haluk Burumcekci, of Burumcekci Consulting, said.
The outlook for 2023 remains uncertain. A national election should take place no later than June, and an opposition victory could see a sharp reversal of President Tayyip Erdogan’s economic policies.
Private consumption remained strong in the third quarter.
Analysts predicted growth would slow in the second half due to a downward trend in foreign demand, notably among Turkey’s largest trade partners.
To counter the slowdown, Turkey’s central bank embarked on an easing cycle between August and November, slashing its policy rate by 500 basis points to 9 per cent.
Erdogan’s economic programme over the last 14 months prioritised growth and exports.
Central bank interest rate cuts that were sought by Erdogan last year led to a 44 per cent depreciation in the lira and it has lost another 29 per cent against the dollar this year, sending inflation to a 24-year high of more than 85 per cent in October.
Last year, Turkey’s economy bounced back strongly from the COVID-19 pandemic and grew 11.4 per cent, its highest rate in a decade. Annual growth in the second quarter of 2022 was revised to 7.7 per cent from 7.6 per cent, data showed on Wednesday.
Meanwhile Turkey’s central bank said it had cut its main policy rate for the fourth consecutive month despite high inflation.
On the wishes of President Recep Tayyip Erdogan, the bank said it had lowered its benchmark rate from 10.5 per cent to nine per cent.
With the latest cut, the rate has reached “a sufficient level with regard to growing risks concerning global demand”, the bank’s council said in a written statement.
It has therefore “decided to put an end to the cycle of lowering interest rates which began in August,” it added.
Erdogan had vowed to lower interest rates to single digits by the end of the year as he prioritises economic growth and jobs over price stability ahead of a general election next June.
Last year, interest rates fell from 19 per cent in September to 14 per cent in December.
They remained stable this year until the summer but have been cut every month since, while inflation has soared.
Turkey’s monetary policymakers are bucking the global trend of central banks raising interest rates to combat inflation, as high borrowing rates cool down the economy and prices. Erdogan, a vocal opponent of higher borrowing costs, has called high interest rates his “biggest enemy”.
But the unconventional economic model has contributed to a plunge in the value of the lira.
The Turkish currency has fallen 28.5 per cent against the dollar since the beginning of January, after losing 44 per cent last year.
Turkey’s central bank has put the finishing touches to a reserve-management system that has stabilised the lira currency ahead of elections in 2023, thanks to nearly 100 new regulations this year, industry sources and officials said.
The policy, adopted in the wake of a historic currency crash a year ago, relies largely on foreign funds obtained from export revenues, foreign homebuyers and other sources to finely balance the market’s supply and demand, the officials added.
Unlike past schemes to support the lira, the central bank no longer needs to constantly tap its own reserves, according to 10 bankers and economists and one Turkish official.
The central bank declined to comment for this article, but senior officials and President Tayyip Erdogan have regularly praised the new regulations.
Bankers’ calculations show the central bank has obtained about $100 billion this year under the new policy. For much of October and November, the lira has very closely tracked the dollar and held steady near 18.6.
The sources, who requested anonymity, said the policy has given the central bank tight control over the forex rate “policy” and may help Ankara keep it stable through to presidential and parliamentary election set for June.
Avoiding further economic or currency upheaval is crucial to Erdogan’s re-election hopes, with Turks already facing 85% inflation. Still, the vote could bring volatility as the opposition has vowed to reverse his policies.
