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CEE & Turkey

Turkish Growth: Is 5% Too Good to be True?

Turkish policymakers finally got some breathing room earlier this month when official data unveiled that Turkey’s economy had grown at 5% in the first quarter of 2017, beating market consensus by more than 1% while raising suspicion among economists

Jun 21, 2017 // 3:40PM

Turkey’s economic growth spiked in the first months of 2017 to its fastest pace in almost two years. According to data presented by the Turkish Statically Institute, the economy grew an astonishing 5% in the first quarter of 2017. A recent Bloomberg survey suggests experts had expected the Turkish economy to put in 3.4% growth.

The recovery in Europe, Turkey’s largest trade partner, boosted exports and industrial output, which at the same time accelerated growth.

Erdogan himself was quick to praise the latest figures, and managed to squeeze in a few jabs at credit agencies – which he heavily criticised earlier this year – during a recent AKP party conference in Ankara.

"We have all witnessed that the Turkish economy is large enough to overcome small shocks. I wonder what credit rating agencies will do next because they would have taken immediate action to downgrade Turkey's credit rating, had the growth rate been realized under the projections," the Turkish President said.

The figures have elicited some scepticism from economists, as the country continues to battle with double digit inflation – which hit 11.7% in May – while at the same time facing political and security challenges.

Jan Dehn, Head of Research for Ashmore, believes that while it’s true the country is recuperating some of the growth it lost last year following the coup attempt, he thinks it’s unlikely to last.

“The biggest problems Turkey’s economy is facing today are high inflation and the current account deficit. Neither of which we expect will be resolved anytime soon.”

Dehn said that the base effect from high inflation last year, coupled with an unprecedented credit stimulus for private sector business introduced in December, were the likely culprits behind the impressive figure. In December the Turkish government set up a TRY250bn fund to help private sector corporate offset some of the challenges created by a weakened currency.

Tatha Ghose, a senior emerging market economist at Commerzbank AG said the numbers could be a bit misleading. Last year Turkey, introduced a new calculation method that resulted in a revision of the GDP for 2015; the new figure – US$861bn – was 20% higher than initial estimates.

“The problem with Turkey is that we don’t trust the ESA2010 GDP data, we are sceptical that this has been done properly,” Ghose said.

According to economist Korkut Boratav, cited in the Turkey Pulse, the new calculation method does not rely on typical international standards used to measure GDP like production, business, and turnover statistics in the industry and service sectors, complete with corresponding data sets on employment, wages, and salaries. Instead, the new methods rely on administrative and bureaucratic records provided by the Finance Ministry, the tax authority, the Interior Ministry and the Banking Regulation and Supervision Board.

“There is wide-ranging scepticism from observers because the old data actually fitted the experience better. Maybe they will review the methodology with the help of external institutions such as IMF or Eurostat, and the historical data will be revised once again.”

GDP growth also appears to be out of sync with other economic indicators, such as unemployment, which rose 11% during the first three months of 2017.

While Turkey still has important growth drivers like favourable demographics and strong foreign direct investment, the country remains extremely vulnerable to external shocks. Part of the challenge is that its vulnerability has largely been masked by an impressive and consistent rally in emerging market assets.

“Turkish assets are lagging and underperforming most peer group countries, but the inflows into EMs are masking the underlying problems of the nation,” Ghose concluded.


CEE & Turkey Policy & Government

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