(Bloomberg) -- Turkey’s economy probably contracted on a quarterly basis for the first time since the Covid-19 pandemic as high interest rates start to bite.
Data due Friday is expected to show a 0.2% decline in gross domestic product in the three months through September, according to the median estimate of economists polled by Bloomberg. The $1.2 trillion economy is still forecast to have grown 2.5% year-on-year, in line with the second quarter.
The central bank is battling inflation of almost 49% with tight monetary policy, holding its key rate at 50% since March. That’s put the brakes on industrial production, though domestic demand remains robust in part due to Turks hurrying purchases of some goods to avoid even steeper prices.
Turkey’s manufacturing industry performed poorly in third quarter, with production contracting by 1.2% from the previous three-month period. Business activity also lagged, while Turkey’s manufacturing purchasing managers index hasn’t reached the threshold that indicates expansion since March.
Excluding volatile sectors, industrial production posted a limited fall in quarterly terms, but its underlying trend remained weak, the central bank said in a summary of its rate decision published on Thursday.
What Bloomberg Economics Says...
“We expect Turkey’s third quarter GDP data to show annual growth slowing as a result of the central bank’s tight policy stance. Looking ahead, growth is likely to remain subdued, with the annual rate slowing to the low 3%’s this year and next from above 5% in 2023.”
— Selva Bahar Baziki, economist. Click here to read more.
Households, which contributed half of the 2.5% annual growth in the second quarter, still seem largely unfazed by higher borrowing costs. Retail sales grew by 4.7% in the third quarter on a seasonally adjusted basis.
Turkey’s central bank sees inflation finishing this year at 44%, before slowing to 21% by the end of 2025.
“We are still not at a level that is very supportive of disinflation, QNB Bank Chief Economist Erkin Isik said. “For that, we need to see more slowdown” in the economy.
The central bank implied after earlier this month that a rate cut could soon be justified due to slowing inflation. The speed of the anticipated monetary easing will have a decisive impact on growth in forthcoming quarters.
The inflationary outlook doesn’t justify an aggressive easing cycle, according to Selva Demiralp, a professor from Istanbul’s Koc University. Thus a significant boost to growth next year is unlikely “because of limited central bank easing,” she said.
(Updated with the central bank statement on 5th paragraph. A previous version of this story corrects reference to GDP period in the deck headline.)
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