Turkey’s growth slower than expected

Financial Times (USA Ed) September 11, 2014, p. 6

By Piotr Zalewski in Istanbul

Turkey’s economy grew at a slower pace than expected in the second quarter following months of political uncertainty and a surge in violence across Iraq and Syria in recent months.

Figures released by Turkey’s statistical institute showed gross domestic product growth had slowed to 2.1 per cent in the three months to the end of June, well below most forecasts.

The growth figure for the first quarter , initially reported at 4.3 per cent, was revised up to 4.7 per cent, compared with the same period last year.

The Turkish lira fell after the release of the data, reaching TL2.21 to the dollar, the lowest level in more than five months, before recovering some of its losses later in the day.

Turkey has been gripped by political uncertainty since the end of last year, owing to a corruption scandal, tensely contested local elections in March and presidential elections last month that saw former prime minister Recep Tayyip Erdogan elected president.

« Turkey’s growth lost some momentum in the second quarter due to the impact of monetary tightening, the delayed effects of macro prudential measures, economic problems in EU countries and geopolitical tensions, » Mehmet Simsek, finance minister, said.

A summer drought that hit Turkish agricultural production, accompanied by unrest in Ukraine and neighbouring Iraq, he said, added to the risk that the government would not meet its 4 per cent growth target for this year.

The second-quarter results are « disappointing but not entirely unexpected », said Inan Demir, chief economist at Istanbul-based Finansbank, referring to a slowdown in industrial production in the last quarter.

« The surprise element lies not with the second-quarter slowdown but in the strong showing in the first quarter, especially after the revision, » he said. « This should ensure that GDP growth for the year will be about 3 per cent. »

The fallout from the war in neighbouring Syria, including the rise of the Islamic State of Iraq and the Levant (known as Isis), has compounded problems for Turkey’s economy.

Exports to Iraq, the country’s second-biggest trade partner, fell by 21 per cent in June, 46 per cent in July and 27 per cent in August compared with last year’s figures, the Turkish Exporters’ Assembly announced last week. Overall exports increased by 5.2 per cent in August.

The slowdown in growth also appears to have exposed the limits of interest rate cuts. Turkey’s central bank has slashed rates four times since an increase in January, most recently in late August.

Despite inflation that threatens to reach double digits, Mr Erdogan has campaigned relentlessly for further interest rate cuts, raising fears that Turkey’s central bank may be giving in to political pressure