Turkish annual economic growth outperformed Europe’s largest economies, beating forecasts in the second quarter, driven by the construction and IT sectors.
Second-quarter gross domestic product (GDP) increased by 4.8%, compared with a forecast of 3.8%, the Turkish Statistical Institute said on Monday. GDP growth quarter-on-quarter also beat expectations, rising 1.6% compared with a forecast of 1.1%.
In comparison, the German economy expanded by an annual 0.2% in the second quarter. French GDP grew 0.8% for the second quarter, while Spain increased 2.8%, according to data from Trading Economics.
“Turkey’s second-quarter GDP data reflected a notable pick-up in annual growth, largely supported by resilient domestic demand,” ING Think said on Monday. “Investments grew by 8.8% YoY, adding 2.2ppt to GDP. This was largely driven by a continued surge in construction investments.”
Construction expanded 10.9% annually in the second quarter, while information and communication grew by 7.1%, the institute’s data showed. The agriculture sector slowed by 3.5%.
Meanwhile, exports from Turkey fell 0.9% year-on-year to US $21.8 billion in August, preliminary data from the Trade Ministry showed. Germany remained Turkey’s largest market, followed by the US and the UK.
The Turkish economy has accelerated “despite tighter financial conditions following political developments,” ING Think said. Turkish President Recep Tayyip Erdogan’s crackdown on opposition parties this year remains a threat to GDP and investor sentiment.
Goldman, JP Morgan Lower Rate Cut Expectations
Goldman Sachs GS on Thursday lowered its expected rate cut from next week’s Turkish central bank meeting to 200 basis points, from the previous 350 bps. The New York-based investment bank cited recent data showing both strong economic growth and hotter-than-expected inflation.
“With Q2 GDP growth far surpassing expectations— despite weaker domestic demand—and August inflation coming in higher than forecast, we believe the (Turkish central bank) will opt for a smaller cut compared to the previous meeting,” Goldman said in a note.
JPMorgan JPM on Wednesday also said it expects a policy rate cut of 200 basis points at the September 1 meeting, down from the previously anticipated 300 basis points.
JPMorgan said it now sees upside risks to its year-end inflation forecast of 29.5%, citing a reversal in earlier food price declines and strong domestic demand. The bank expects inflation to rise to 31.8% year on year in September, partly driven by back-to-school services repricing.
Turkey’s annual inflation rate remained high at 32.95% in August, slightly above market expectations of 32.6% and slower than 33.52% in July.
Inflation has slowed since August last year as the country’s central bank implements an aggressive rate policy. So far this year, the central bank has raised its main interest rate three times, with the last rate hike in April to 49% from 46%.
Turkish Economy Faces Political Headwinds
Despite the strong economic performance this year, Turkey faces political headwinds. Investors are wary of the political disruptions in the country.
A Turkish court ordered the removal of the central opposition Republican People’s Party’s (CHP) Istanbul administration on Tuesday, Bloomberg reported. The ruling will likely disrupt the party as it tries to mount a challenge to Erdogan.
In response, the benchmark BIST-100 closed down 3.6% on Tuesday, after falling as much as 5.9%. The stock market year-to-date has climbed 9.2%.
The removal also caused a selloff of Turkish bonds and galvanised the central bank into action, Reuters reported, citing traders. The central bank sold $4 billion to $5 billion in reserves to stabilize the lira, which has held mostly steady over the last two days.
Authorities also detained six officials from two opposition-run municipalities in Istanbul on Wednesday, Turkish State broadcaster TRT reported.
Erdogan’s Judges Implement Aggressive Crackdown
The government has implemented an aggressive judicial crackdown against the CHP. Istanbul Mayor Ekrem Imamoglu, the party’s most popular official, was jailed in March.
Police arrested Imamoglu, Erdogan’s principal challenger in the upcoming presidential elections, in a pre-dawn raid on March 19. The 55-year-old mayor‘s detention happened days before his party, the CHP, was reportedly due to nominate him as its candidate in the 2028 elections.
The arrests ignited protests across the country. Turkey’s Interior Ministry said on social media that 1,133 suspects were detained in “illegal activities” from March 19 to 23. The Turkish lira has lost over 17% against the US dollar year-to-date, currently trading at around 41.26 liras per dollar.
“The economy is a real trouble spot for Erdogan and can damage his presidential campaign,” Theodore Karasik, a Non-Resident Fellow, Jamestown Foundation, Washington, DC, told European Capital Insights. “The economy is key, and the opposition knows that. If Erdogan’s crackdowns escalate, it could backfire on him.”
Disclaimer:
Any opinions expressed in this article are not to be considered investment advice and are solely those of the authors. European Capital Insights is not responsible for any financial decisions made based on the contents of this article. Readers may use this article for information and educational purposes only.
Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
