2023-05-08 05:00:44
2023 growth halved to 2.6%; earthquake disaster burdened; massive inflation and looming currency crisis; political and economic stabilization necessary
Vienna (OTS) – Economically, Turkey is facing difficult times ahead of the presidential elections on May 14th. This is shown by the new economic forecast of the Vienna Institute for International Economic Comparisons (wiiw). While the country still grew by 5.6% in 2022 (after 11.4% in 2021), growth is likely to halve to 2.6% this year. Private consumption, the most important pillar to date, will lose momentum in 2023. The reasons for this lie in a waning demand after the catch-up effects in the course of the recovery from the corona pandemic and a dwindling purchasing power of the population due to record high inflation.
Last year it was no less than 72%. For this year, too, the wiiw expects inflation to be a little under 50%. The question of how the country will continue after the presidential elections is causing uncertainty. The consequential damage from the severe earthquake in February and the effects of the restrictive monetary policy of the US Federal Reserve and the ECB in Frankfurt are also having a negative impact. Turkey, which is heavily indebted in US dollars and euros, is feeling the effects of every interest rate hike. The country’s already high current account deficit – ie the balance between exports and imports of goods, services and capital – also increased by 54% from January to February compared to the previous year. It is questionable how much longer it can be funded. The Ukraine war is also having a negative impact. While Turkey initially benefited from the influx of Russian capital and as a hub for trade with Moscow, the partial ban on exports of sanctioned Western products to Russia is now causing irritation with the Kremlin.
Impending currency crisis
“If ultra-accommodative monetary policy continues, the country faces another sharp devaluation of the lira and greater risks for the financial sector, especially if the Fed continues to hike rates.”
says Richard Grieveson, deputy director and Turkey expert at wiiw. “In 2018 we saw clearly what problems this monetary policy can cause, especially in combination with unfavorable external conditions”
so Grieveson.
But even if there is a change of government, it will probably only be possible to get inflation under control in the medium term. “Although the opposition, with its presidential candidate Kemal Kilicdaroglu, promises the end of Erdogan’s unconventional economic policy and an independent central bank, the latter would only be able to raise interest rates slowly in order to avoid a shock in the financial system.”
analyzes Meryem Gökten, also Turkey expert at wiiw and author of the new forecast for the country.
Earthquake slows growth
The damage caused by the devastating earthquake in February this year is a major challenge for any new government. Around 13 million people in ten provinces of the country are affected by the disaster. Over 50,000 people were killed. The regions devastated by the earthquake have so far generated 9.3% of Turkey’s GDP, 8.5% of exports and 15% of agricultural production. The Turkish government estimates the total damage at around 104 billion US dollars. “While recovery spending should support the economy, overall growth will suffer from the destruction of infrastructure and machinery, disrupted supply chains, and lost labor and investment.”
, states Gökten. Not least because of this, the wiiw has revised its growth forecast for Turkey for the current year down by 0.4 percentage points to 2.6% compared to the winter.
Political and macroeconomic stability needed
According to the wiiw analysis, Turkey basically has enormous growth potential. However, this can only be improved by greater political and macroeconomic stability. Above all, a prudent, stability-oriented monetary policy would be necessary in order to curb high inflation and the depreciation of the currency. Tackling the chronically high current account deficit, which has become more difficult to finance in recent years and has left Turkey dependent on swinging foreign investor sentiment and US monetary policy, should be another priority of any new government.
To this end, domestic industrial production must also be boosted in order to reduce the dependency of economic growth on private household spending financed by credit. “More foreign direct investments can only be attracted through more political and macroeconomic stability. These are essential for the necessary structural change in Turkey, but also for the reconstruction after the earthquake disaster.”
concrete Mary from the sky.
The new wiiw Turkey analysis is available for download here.
Questions & contact:
Andrew Knapp
Communications Manager
Tel. +43 680 13 42 785
knapp@wiiw.ac.at
1683523777
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