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Growth in Turkey: Too much of a good thing?

9/10/2021

The Turkish economy has experienced a stellar growth during the 2nd quarter of 2021, compared with the same quarter a year earlier. A recovery is normal since the country experienced a wide lockdown in 2020Q2, but its size is impressive. However, the Turkish economy is facing at the same time a strong inflation that reached 19% in August 2021.

Stéphane Colliac

TRANSCRIPT // Growth in Turkey: Too much of a good thing? : September 2021

Turkish growth is a never ending story that often surprises on the upside. In 2020, the country has experienced heightened pressures on the exchange rate, a wide lockdown in 2020Q2, and a lost summer season. However, the Turkish economy has registered a positive 1.8% of growth, compared to sizeable losses in other countries.

In 2021, growth will be stellar. The 2nd quarter has ended with a 21.7% of growth year on year, even though the recovery from a wide lockdown in 20Q2 has explained part of the performance. At the end of the day, Turkey will grow roughly at two-digits in 2021, easily above other economies. A strong performance relying primarily on a strong growth of local banking loans observed during 20Q2 driving primarily investment growth.

It was good news since the country had experienced a downward investment cycle during the two former years, with plausible long-lasting impacts on potential growth. However, now that investment is again increasing, the main risk is to see diminishing returns, as it was observed during similar past waves of investment when productivity gains were very low, increasing Turkish exposure to a deterioration of its trade balance.

Moreover, a credit-based recovery may well have inflationary impacts, as it supposes more money supply. And the exchange rate depreciation observed in 2020 has added to the inflation rate which increased to 19% in August 2021.

This unpleasant arithmetic and the new monetary easing measure implemented in July 2021 are suggesting that this growth-inflation environment should hold for longer in Turkey, with the risks that this situation entails.

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