ISTANBUL—Turkish economic growth is expected to fall short of sharply lowered government forecasts this year and next, with a recession now likely in the coming six months, a Reuters poll showed, underscoring serious damage from a currency crisis.
The lira has collapsed nearly 40 percent this year, pushing up the price of everything from food to fuel and sending annual inflation to nearly 25 percent, its highest in 15 years.
Sparked by concerns about President Tayyip Erdogan’s control over monetary policy, the sell-off has prompted the central bank to hike rates aggressively, although not enough to reverse the lira’s losses. Investors are now worried about slowing output and the potential impact on the banking sector.
The economy will expand 3.3 percent this year and just 1.1 percent next year, according to a poll of 46 economists. That is well below the government’s lowered forecasts of 3.8 percent growth for this year and 2.3 percent in 2019 announced by Finance Minister Berat Albayrak last month.
“The Turkish central bank’s sharp monetary tightening is set to put an additional brake on economic expansion in the long-term,” analysts at Danske Bank wrote in a recent note.
“We see that risks of recession during the next 12 months have notably increased.”
A previous Reuters economic poll in July had put 2018 growth at 4.1 percent and 3.5 percent for next year—signaling how dramatically sentiment toward Turkey has deteriorated in the space of just three months.
The economy is now expected to contract 1.4 percent in the fourth quarter of this year and officially enter into a recession—defined as two consecutive quarters of negative growth—in the first three months of 2019, with a 2.1 percent contraction, the latest poll showed.
Those quarterly growth forecasts are based on a smaller sample of contributors.
“A steep recession is underway,” noted Liam Carson, Emerging Europe Economist at Capital Economics in London.
Ratings agencies have repeatedly sounded alarm about the outlook for Turkey, and in particular, its banks. Albayrak has promised $12 billion in new savings and revenue for 2019 under the government’s new economic program, but that has failed to mollify investors.
For years, Turkish companies, particularly construction firms, borrowed in dollars and euros, drawn by cheaper interest rates. But the lira crisis has driven up the cost of servicing that debt, meaning lenders—themselves reliant on external financing—also face a wave of defaults at home.
Inflation is expected to average 25.3 percent in the fourth quarter, and surge to 28.6 percent in the first quarter of 2019, the poll showed.
But despite that increase, economists predicated the central bank’s main policy would stay at 24 percent until the third quarter of next year when it would begin to decline slightly.
Erdogan, a self-described “enemy of interest rates” has repeatedly called on the central bank to lower rates and provide cheaper credit to companies. While the bank has hiked interest rates by 11.25 percentage points this year, investors say it has been slow to act and not aggressive enough.
By Sujith Pai & Indradip Ghosh