Turkey – Economy Supported By Rate Cuts

Originally published in Eastern Europe Consensus Forecasts: September Survey of Professional Forecasters. To request access to the full publication, and see the complete set of survey results, please contact editors@consensuseconomics.com or subscribe here.

The national accounts update on September 2 showed the economy in the very early stages of a recovery after entering recession last year. GDP growth in q-o-q terms rebounded to +1.6% in Q1 and +1.2% in Q2, after contractions of -1.4% and -2.8% in Q3 and Q4 2018, respectively. The y-o-y outturn in Q2 2019 was negative for a third successive quarter, however, depressed by a -22.8% decline in gross fixed investment.

The government appears confident of a positive full-year 2019 GDP reading, backed by new financial reforms. Our panellists are less convinced, but do expect an upturn in 2020 (+2.2%) supported by lower borrowing costs. The central bank slashed its main policy rate by another 325bp to 16.5% last week, following July’s aggressive rate cut of 425bp. Inflation has dropped in recent months, but a spike in energy costs and further monetary easing could revive fears over financial stability.

Turkey registered a current account surplus of US$1.2bn in July, as a slump in domestic demand curbed imports. While a recovery in household spending may push it back into deficit in 2020, the correction over the past 6-12 months has lowered the country’s debt exposure.

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