Turkey's economy grew faster than expected in 1Q22, driven by the increase in domestic consumption and exports. Gross domestic product increased by 7.3% year-on-year in the January-March period, exceeding the economists' median estimate of 7.2%. While GDP increased by 1.2% compared to the previous quarter, the economy has been growing for 7 quarters. Turkey's GDP size at current prices was 794 billion dollars. The economy, which gained serious momentum during the recovery from the pandemic and the normalization of life in 2021 and recorded one of the highest growth rates in the G-20, started 2022 with a strong rate, but due to the effect of price and lira instability for the next period, which strained household budgets and eroded disposable income, may be exposed to downside risks.
Looking at the sub-items; In the composition distribution, it is seen that especially the domestic consumption side has developed very strongly. Household consumption increased by 19.5% in 1Q22 from the previous year. This could be read as a sign that domestic demand remains strong after the central bank's successive rate cuts at the end of 2021. In the details of this, the weight of the segment that has an effect on private consumption is relatively high, because in a high inflation environment, those who have the opportunity in terms of income tend to consume more and this both adds to the secondary effects of inflation and has a distorting effect on income distribution.
On the basis of other items; Exports increased by 16.8% in the same period as Turkish manufacturers benefited from the weak lira and strong recovery in key markets. Foreign demand has a very positive effect on growth. However, more importantly, we expect the contribution of foreign demand to growth to decrease significantly as of 2Q22. This negative situation may continue to increase in the second half of the year and in the first part of 2023. When we look at this causally, we see multiple details: First, the external balance tends to deteriorate due to high oil and commodity prices, and a higher current account deficit is due to the ongoing additional effects from the Russia-Ukraine war. Secondly, with the slowdown in European economies, there is a tendency to suppress exports due to the lack of global demand, regardless of the exchange rate. This situation may make itself felt more especially after May. Consumption is losing momentum due to increased commodity, especially natural gas and energy prices in Europe due to the war effect. Accordingly, forecasts for world economic growth, especially in Europe, are revised down.
Exporters also have difficulties in purchasing raw materials due to high commodity prices. The fact that the Russia-Ukraine war may continue for a long time will prevent the decrease in commodity, energy and agricultural prices and will also create a basis for a decrease in global demand. This causes the factors that are independent of the exchange rate to be effective in export trends. At the same time, the cycle that started with the monetary tightening of the Fed brings with it a global rising interest rate environment, which causes the demand environment in the world to be affected by this. Even if there was no rapid tightening due to inflation, it was known that there would not be plenty of liquidity during the end of Covid and the normalization phase. In this environment, we expect the net export contribution to decrease as well.
On the investment side, we still do not see as much momentum as we would like. While investments recorded an annual increase of 1.1%, the contribution to total GDP was realized as 0.3 points. While we observe a limited contribution in public expenditures, we can expect the growth contribution of this item to increase in the following quarters in light of increased budget expenditures and broad fiscal policies supported by growth. On the production side, the added value of the agricultural sector still remains low, signaling a neutral growth effect for the year. Of course, it is not a positive detail, especially in an environment where food inflation is struggling. Services and retail, on the other hand, provided growth with the normalization, after the market was closed last year due to Covid. In the next year, with the effect from this, the growth momentum can be expected to decrease in this item as well.
It is in question that Turkey's potential growth comes down with the economic developments in the last 3 years, internal shocks and global shocks such as Covid, and the long-term path, which is 5% under normal conditions, comes down. At the same time, while the growth continues, the revival of the inflation environment and the absence of a growth composition that increases employment reveal the structural problems. In this context, there is a need to shift the items from which growth is fed from consumption-weighted to investment-weighted ones. Moreover, GDP in dollar terms contracted by 4.7% in 1Q22. While the current economic model keeps interest rates low, it also causes TRY to be worthless. In this environment, the contribution that was thought to be taken from the current account balance, thanks to the growth in exports, was expected to reduce inflation as well. However, in the 6-month period following the implementation of the new economy perspective, current account deficit plus inflation increased from 21.3% to 70%, and serious deterioration occurred in the expectation channel. In addition to the 7.3% rate of growth in TRY terms, the employment potential for healthy and sustainable growth, the ongoing shrinkage in dollar terms and the decreasing national income per capita should also be addressed.
In terms of access to finance, we consider that ultra-financial easiness will be replaced by tighter financial conditions and will suppress consumption and investment trends. Even if the policy rate is 14% in the current environment, the stress factors in the access to credit and the effects of the general exchange rate will be effective in this. We think that the loan outflows of the banking sector will not be as high as 1Q22 due to the RR application on assets.
As a result; Nominal rates seem positive, but when we add factors such as inflation and exchange rate increase, the trend in real terms, especially on the export side, will start to show a weaker picture. We expect the strong economic activity trend observed since 4Q21 to decline with the signs of recession that became evident in the following quarters, although there was no slowdown in 1Q22. While the growth effect of external demand will be adversely affected by geopolitical risks, we expect domestic demand to erode due to the decrease in purchasing power due to increasing inflation and accordingly the consumption shock. Considering that a similar base effect in inflation will also be valid for growth, it is clear that the following year will be in a lower growth cycle due to the high growth rate of the previous year. In this context, we expect the growth, which we expect to regress to around 3% in 2Q22, to slow down a little more after 3Q22 and to realize a growth in the 3-4% band throughout the year. We think that six potential low growth paths may continue in 2023, in light of these factors. The risks to these forecasts are on the downside.
Kaynak
Hibya Haber Ajansı
