Turkey’s economy continued its rapid expansion in the third quarter, but analysts warned that the pace of growth was unsustainable given rapidly rising inflation and a depreciating lira.
Strong household consumption helped power GDP growth of 7.4 per cent between July and September compared with the same period in 2020.
The expansion was also fuelled by government spending and a boom in exports, which rose by close to 26 per cent year on year.
The figures, which come on the heels of annual growth of 22 per cent in the second quarter of 2021, will be hailed by Turkey’s president Recep Tayyip Erdogan, whose political fortunes are widely seen as linked to the performance of the country’s $795bn economy.
Both the Turkish government and independent forecasters expect overall GDP growth of about 9 per cent in 2021 — a rate likely to be one of the fastest in the world.
Jason Tuvey, of the consultancy Capital Economics, said the Turkish economy had been “really motoring along” in the third quarter.
But he warned that the fast-paced expansion was unlikely to last given the sharp slide in the lira, which has lost more than 30 per cent of its value against the dollar since the central bank began cutting interest rates in September under Erdogan’s orders.
“Turkey is still in a currency crisis and some of the more pernicious effects we would expect from a sharp currency fall are likely to filter through,” said Tuvey, who predicts a downturn in either the final quarter of this year or the first months of 2022.
“While the weak lira will probably support net trade it’s likely to weigh heavily on domestic consumption. As inflation rises and household incomes suffer, consumption is likely to fall back.”
That view was echoed by the investment bank Goldman Sachs. “Anecdotal evidence suggests that the recent lira depreciation has been disruptive to economic activity,” its analysts wrote in a note to clients published prior to Tuesday’s data.
Erdogan, who holds the unorthodox view that high interest rates cause inflation rather than cooling it, has pressured the central bank to cut rates three times in the past three months even as annual inflation has climbed to almost 20 per cent.
The Turkish president, whose fixation on fast-paced growth at all costs has led to repeated bouts of high inflation and financial volatility in recent years, has during previous crises been forced to accept sharp rate rises to restore stability. That has taken a toll on growth.
This time, however, Erdogan has insisted rate rises are not on the cards. Speaking last week, he said he would not countenance “crushing our people and our farmers” with high interest rates, adding that the cost of borrowing would fall further.
The Turkish president has argued a weak lira will boost exports, investment and employment. Economists say that, even if parts of the strategy succeed, it will come at a cost of soaring inflation that risks severely eroding standards of living.
Source: Economy - ft.com
