(Bloomberg) -- Turkey’s $1.1 trillion economy grew much faster than forecast, avoiding a contraction during a two-quarter stretch when the central bank delivered the bulk of its massive interest-rate hikes.

Gross domestic product expanded 1% in the fourth quarter from the prior three months in seasonally and working-day adjusted terms, according to data published on Thursday. That marked a slight acceleration from the third quarter, when GDP expanded just 0.3%.

Household spending and investment powered a pickup in the fourth quarter that was higher than all but one forecast in a Bloomberg survey of economists, whose median was 0.3%. The economy grew 4.5% in the full year, down from 5.5% in 2022. 

“We continue to see a consumption-oriented growth albeit at a slower pace, evident from the momentum loss in imports and the net export contribution to GDP getting closer to zero,” Okan Ertem, senior economist at Turk Ekonomi Bankasi AS.

The pivot toward tighter monetary policy since June was trying to put restraints on consumption that accounts for more than half of gross domestic product. The goal is to engineer a slowdown in inflation swollen from an era of cheap money.

Yet even on an annual basis, the economy fared far better than expected last quarter, with GDP growing 4% from a year earlier. That was more than the 3.5% median estimate in another Bloomberg poll but a slowdown from an upwardly revised gain of 6.1% in the third quarter. 

“We are moving toward better quality growth with investment and exports that we strongly support,” Treasury and Finance Minister Mehmet Simsek said in a statement. “In 2024, we expect moderate and balanced growth, with net external demand making a positive contribution.”

A less upbeat outlook doesn’t mean the central bank won’t consider further rate hikes on top of a cumulative 36.5 percentage points of increases through January. Newly installed Governor Fatih Karahan already signaled more tightening could be warranted should domestic demand take off after wage increases in Turkey. 

While the economy is shifting into lower gear, the resilience of consumer spending may present a challenge for Karahan as he looks to bring inflation to 36% by the end of the year, roughly half the peak level it’s expected to reach in the coming months.

What Bloomberg Economics Says...

“Household consumption defies gravity in Turkey’s fourth-quarter GDP data — and that is bad news for the central bank. With growth likely to receive a pre-election bump in the first quarter of 2024, pressure is mounting on policymakers to deliver further tightening post the vote. Whether this will be through higher rates or restrictive alternative tools will depend on how inflation progresses over the next few months.”

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

A quarterly contraction in industrial production during the final three months of last year contrasts with a slight expansion in retail sales. It’s a pickup attributed in part to a recent spike in credit card spending, as consumers brought forward their purchases in anticipation of higher wages ahead of local elections in March.

Economists at Turkiye Garanti Bankasi A.S. said their big data indicators “signal that consumption is not decelerating much further since November,” according to a report this month. “Domestic demand remains stronger than supply, posing risks on both inflation and the current account deficit.”

--With assistance from Joel Rinneby.

(Updates with comment from Bloomberg Economics.)

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