Turkey’s official first-quarter GDP growth rate has beaten expectations, rising 7% y/y and 1.7% q/q, but many economists see the economic surge as running on feet of clay.

“Most decent economists realise this growth has been bought at the price of a weaker currency and higher inflation, making Turks a lot poorer in dollar terms,” said Timothy Ash, senior emerging markets strategist at BlueBay Asset Management.

Enver Erkan, chief economist at Istanbul’s Tera Yatirim, responded to the GDP figures posted by the Turkish Statistical Institute (TUIK, or TurkStat) by saying that there is an “exchange rate illusion” in Turkey’s economic growth data. GDP per capita in dollar terms has shrunk nearly 40% since 2013 to around $7,700 last year, making Turkey’s economic model unsustainable because the growth is largely driven by government spending and efforts to boost lending, Bloomberg quoted Yatirim as saying.

Ramped-up lending

Turkey’s Erdogan administration last year pushed banks to ramp up lending to help businesses and consumers survive last year’s coronavirus crisis. The credit boom took place in tandem with a front-loaded easing cycle, weakening the Turkish lira (TRY) by 20% last year and ensuring official headline inflation could not escape the double digits. The currency shed another 10% against the dollar in the first quarter, with President Recep Tayyip Erdogan’s shock firing of the central bank’s hawkish and market friendly governor of four months Naci Agbal, in March, sending the lira into another tailspin. At the end of last week, the currency hit another all-time low.

The median of 22 forecasts in a Bloomberg survey was for Q1 GDP growth of 6.3% y/y. In a Reuters poll, the median prediction was 6.7% y/y.

The announced outcome means Turkey grew faster than all Group of 20 nations except for China in the first quarter. Economic output in the first quarter was $188bn. Output in the 12 months to March totalled $728bn.

Year on year, first-quarter final consumption expenditures for households rose 7.4%, government final consumption moved up 1.3% and gross fixed capital formation increased by 11.4%, TUIK said. Exports of goods and services climbed 3.3% y/y, while imports of goods and services decreased 1.1%, it added.

Risk to tourism season

Most forecasts expect Turkey will clock GDP growth of 5-6% in full-year 2021, though the country risks losing much of its international tourism season if countries from where many tourists traditionally arrive—such as Russia, Germany and the UK—cannot be persuaded that it has got its latest wave of the coronavirus pandemic sufficiently under control.

In a note, analysts at BBVA Research said that Turkey’s current strong growth momentum and ongoing credit growth, along with a positive global outlook brought upside risks to their prudent 2021 growth forecast of 5%.

They said: “Domestic demand [in Q1] gave a robust contribution of 6.0pp, while the contribution of net exports turned into positive (1.1pp) for the first time after 5 quarters. All of the sectors gave positive contributions in yoy terms where the highest support was from the industry with 2.5pp, which was followed by trade, transportation, accommodation sectors’ contribution of 1.4pp.”

“The slow-down is still not clear so far due to the reopening [after the May lockdown] again and continuing credit growth rates at moderate levels. Private consumption still accelerates whereas investment stabilizes as of May,” BBVA added.

“On the negative side,” BBVA said, “tighter financial conditions, downside risks on tourism revenues and finalization of the ban on lay-offs and short-term working allowances in June all raise the uncertainty. All in all, a positive surprise is now more likely given the pending reaction of the economy with the reopening in late May.”

Looking at the risk that many Turks are not feeling the recovery, it is concerning that GDP per head last stood at the low levels in evidence now in 2003, the year Erdogan came to power as the country’s prime minister, according to World Bank data.

Turkey’s net minimum wage of TRY 2,826 ($333) per month is, meanwhile, now below the hunger threshold for a family of four of TRY 2,830, according to the Confederation of Turkish Trade Unions (TURK-IS).

With Erdogan facing record low approval ratings, investors will remain anxious that the executive president will now order the central bank to cut the benchmark interest rate of 19% (versus official annual inflation of 17.1%) prematurely to help trigger more economic activity. That would threaten more inflation and lira instability.