Turkey Economy Set to Slow After Erdogan’s Pre-Vote Money Boost

(Bloomberg) -- Turkey’s economy expanded more than expected at the start of the year, bolstered by pre-election spending and strong household consumption, though the rest of 2023 looks bleaker.

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Gross domestic product grew 4% year-on-year in the first quarter, data from the state statistics agency showed. Analysts predicted a rise of 3.5%, according to a Bloomberg survey.

Fiscal stimulus and ultra-low interest rates helped ease the impact on the $900 billion economy of two massive earthquakes that hit southeast Turkey in February. But the outlook is darkening as the newly re-elected president battles a cost-of-living crisis.

Read more: World Tries to Read Erdogan for Signs of Turkey Policy Shift

In Sunday’s presidential runoff, incumbent Recep Tayyip Erdogan defeated Kemal Kilicdaroglu to extend his rule into a third decade.

The lira has since plunged to record lows of 20.7 against the dollar, losing over 3.5% of its value.

What Bloomberg Economics Says...

“We expect a shift in economic policies toward orthodoxy later in the year, including a central bank rate hike. Such a move is likely to dampen activity, driving our call for growth to slow in 2H. We expect GDP growth to end the year at an annual rate of 2.9%.”

— Selva Bahar Baziki, economist. Click here to read more.

Turkey was the fastest-growing economy among the Group of 20 nations last year after Saudi Arabia and India, expanding more than 5%. Erdogan’s administration fueled that expansion through cheap lending and heavily subsidized utility bills, as well as increases in the minimum wage and pensions.

Those moves and negative real interest rates have come at the expense of currency and price stability, with inflation peaking near 86% last year. It’s decelerated but is still nearly 44%, more than anywhere in the G-20 except Argentina.

With victory secured, Erdogan’s officials are set to shift their focus to widening deficits in the budget and the current account.

Read more: Turkish Lira Sinks, Stocks Gain as Investors Bet on Policy Shift

Economic growth will dip to 1.6% in the second quarter year-on-year, according to a Bloomberg survey of analysts, and to 2.7% for 2023 as a whole.

The European Bank for Reconstruction and Development this month cut Turkey’s 2023 GDP growth estimate to 2.5%, from 3%, citing external vulnerabilities over pressure on the lira and a massive current-account deficit.

In the first quarter, GDP rose 0.3% from the previous three months in seasonally and working-day adjusted terms. That was below the forecast in Bloomberg’s survey of 0.5%.

--With assistance from Joel Rinneby.

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