Turkish economy grows 5.7% in Q1 on robust domestic demand

Türkiye’s economy expanded by 5.7% in the first quarter, official data showed Friday, marking one of the world’s highest growth rates at the start of the year that matched market forecasts, driven by robust domestic demand despite tight monetary policy.

Growth is expected to moderate during the rest of the year as the central bank’s series of aggressive interest rate hikes in the face of soaring inflation weigh on economic activity.

Treasury and Finance Minister Mehmet Şimşek said thanks to rule-based, predictable policies, the country is heading toward more balanced and sustainable growth this year.

“Indicators for Q2 indicate that the balancing of the economy continues. We see balanced growth in 2024, with a positive contribution from net foreign demand,” Şimşek said in a statement.

Analysts in a Reuters poll foresaw a 5.7% growth in the January-March quarter. The median forecast in a Bloomberg poll was for a 5.8% expansion.

Türkiye’s economy grew an annual 4.5% in 2023 and 4% in the first quarter of that year, despite a slowdown in main trading partners and devastating earthquakes in February.

Vice President Cevdet Yılmaz emphasized that Türkiye has maintained uninterrupted economic growth for 15 consecutive quarters in an environment where “political stability and security ensure economic predictability.”

The country’s gross domestic product (GDP) reached TL 8.8 trillion ($285.57 billion) in the January-March period, the Turkish Statistical Institute (TurkStat) said.

The annualized national income has reached a new historical peak of nearly $1.16 trillion, Yılmaz wrote on social media platform X, formerly Twitter.

Türkiye has become the fastest-growing economy compared to EU and G-20 countries that have announced their first quarter data, said Trade Minister Ömer Bolat.

The central bank raised its benchmark policy rate by a total 4,150 basis points in a tightening cycle since last June, the latest one to 50% in March, citing deterioration in the inflation outlook.

In April and May, it decided to keep the one-week repo rate unchanged, considering the lagged effects of the monetary tightening, and vowed to tighten further if the inflation outlook worsens.

Annual inflation is expected to hit around 75% this month, according to officials and market forecasts. It is seen declining in the second half due to the tighter policies.

Earlier this month, the central bank nudged up its year-end inflation forecast to 38% and said they would “do whatever it takes” to avoid any longer-term deterioration of inflation outlook.

In January and February, inflation climbed 6.7% and 4.53%, respectively, largely due to a big minimum wage hike and an array of new-year price updates. In March and April, the rise slowed to around 3.2%.

Annual inflation stood at 69.8% year-over-year last month.

Economists have said the annual minimum wage hike and households bringing purchases forward in expectation of higher inflation powered the strong growth ahead of the local elections on March 31.

Even with tighter monetary conditions, first quarter gross domestic product grew 2.4% from the previous quarter on a seasonally and calendar-adjusted basis, data from the TurkStat showed.

In the first quarter, the total value added increased by 11.1% in construction and 5.5% in information and communication.

The final consumption expenditure of resident households increased by 7.3% in annual terms, the data showed. Exports rose 4% and imports fell by 3.1% in the period, the data showed.

Şimşek indicated that the slowdown in domestic consumption would lead to a decrease in inflation.

“The growth composition that has balanced thanks to our program, declining current account deficit, increased confidence, improved expectations, and accelerated inflow of foreign resources will significantly contribute to disinflation,” the minister said.

Government final consumption expenditure increased by 3.9% and gross fixed capital formation increased by 10.3% compared with the same quarter of the previous year.

Yılmaz stressed the increase in fixed capital investments and the slowdown in the growth rate of consumption expenditures indicate that growth is progressing with a “healthier composition and in line with our disinflation approach.”

The contribution of net exports to growth has turned positive after five quarters, said Yılmaz.

Due to the trend of increasing exports and decreasing imports that began in the second half of last year, net exports are expected to contribute positively to growth throughout 2024, said Bolat.

“This rebalancing in the growth composition not only leads to a higher quality growth trajectory but also strengthens macroeconomic stability,” he noted.

The economy is predicted to grow 3.15% in 2024, according to the Reuters poll.

The government has said the policies will facilitate bringing inflation down while changing the composition of economic growth and attaining sustainable growth levels.

Forecasts announced in September showed the government expects the economy to grow 4% this year.

Yılmaz said Türkiye is in a period marked by decreasing current account deficit, rising foreign exchange reserves and improved risk indicators.

“The monthly results we have achieved in our fight against inflation, which is our top priority, will bring significant annual declines in the second half of the year. Unemployment continues to remain at single-digit levels,” he said.

“We will steadfastly continue to implement our medium-term program for stable, balanced, and inclusive growth to achieve permanent increases in prosperity.”