Moody’s raised its growth forecast for the Turkish economy this year from 2.6% to 4.2%

September 5, 2023

Moody’s, the global credit ratings agency, has updated its economic growth forecast for Turkey in 2023 and 2024, as per its latest Global Macro Outlook 2023-24 August report released on Thursday.

In the report, Moody’s predicts that Turkey’s Gross Domestic Product (GDP) will grow by 4.2% this year. This is a significant upward revision from their previous forecast in May, which stood at 2.6%.

Looking ahead to 2024, the agency expects the Turkish economy to expand by 3%, another upward revision from their earlier projection of 2%.

Moody’s has identified Turkey as one of the countries where economic activity in the first half of 2023 has exceeded their initial expectations.

This assessment comes on the heels of recent data showing that Turkey’s economy grew by an impressive 3.8% in the second quarter of the year, largely due to robust household spending.

However, analysts anticipate a slowdown in economic activity as the year progresses. This deceleration is attributed to the fading effects of election-related stimulus measures and substantial interest rate hikes.

On a quarterly basis, Turkey’s GDP increased by 3.5% after adjusting for seasonal and calendar factors, surpassing earlier predictions.

This growth was partly fueled by a more than 10% rise in household expenditures, driven by a drop in the value of the currency in June and a rebound in inflation, which encouraged consumption.

Fiscal stimulus measures implemented in anticipation of the May elections, which saw President Recep Tayyip Erdoğan’s rule extended, also contributed to economic growth. These policies included significant reductions in interest rates and provided a boost to economic activity.

However, following a reversal in the central bank’s policy in June, with interest rate hikes totaling 1,650 basis points, economic growth is expected to cool down. Inflation stood at 47.83% in July and is projected to exceed 55% in August.

Although inflation briefly eased to 38.21% in June, it surged again to nearly 48% in the subsequent month, driven by the depreciation of the Turkish lira and tax hikes.

The central bank announced that the annual Consumer Price Index (CPI) is likely to hover around 62% by the end of 2023, at the upper end of its forecast range provided in its latest inflation report.

Minutes from the Monetary Policy Committee’s recent meeting indicated that annual inflation is expected to rise significantly in August, with surveys suggesting it exceeded 55% last month.

The central bank reiterated its commitment to gradually strengthening monetary tightening as needed, with the goal of achieving disinflation by 2024.

In addition, Turkey’s first-quarter growth was revised downward to 3.9% from 4%, largely due to massive earthquakes in February that caused significant devastation and a reconstruction cost exceeding $100 billion.

Despite challenges, Turkey’s economy rebounded strongly from the pandemic, growing by a revised 5.5% in 2022. This was attributed to robust domestic demand and exports, even though its main trading partners experienced a growth slowdown due to the Ukraine conflict, which impacted exports in the latter half of the year.

Moody’s also noted that it expects tight financial conditions to persist globally over the coming year, potentially restraining overall economic growth. It estimates that real GDP growth for the G-20 nations will slow to 2.5% in 2023 and 2.1% in 2024, down from 2.7% in 2022.

The report acknowledges a receding recession risk in the United States but emphasizes that below-trend output is necessary for inflation to sustainably reach the Federal Reserve’s target. Moody’s has raised its 2023 growth forecast for the U.S. economy to 1.9% from 1.1% in its previous May outlook.

China’s economic challenges have led Moody’s to lower its 2024 growth expectations for the country, revising it down from 4.5% to 4.0%.

The report concludes by noting that while inflation is declining as expected and is likely to continue receding over the next year, there are still inherent risks. Major central banks, including the Federal Reserve, European Central Bank, and Bank of England, are expected to maintain a restrictive policy stance through 2024. Elevated core inflation, driven by tight labor markets and resilient demand, will keep these central banks vigilant in their monetary policy decisions.

Source: Daily Sabah
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