The Turkish economy is growing, but the citizens don’t notice
The Turkish economy grew by 7 percent in the first quarter. This is evident from figures published on Monday by the Turkish Institute of Statistics (TUIK). This made Turkey the fastest growing economy in the world after China. But Turkish citizens hardly notice this. Since the pandemic, unemployment has risen to 13 percent. And as a result of particularly high and rising inflation (17 percent in April) and the falling lira (10.4 per euro, at the beginning of this year 9 per euro), poverty has returned to its 2012 level.
The growth figures are slightly higher than many economists had expected. The total turnover of economic production in the first quarter amounted to 154 billion euros. The increase was mainly driven by the growth of the manufacturing industry, such as the large textile and clothing industry, which is benefiting from the economic recovery in Europe and a strong competitive position due to the depreciation of the lira. From January to April, exports to EU countries increased by 33 percent compared to the same period last year.
The World Bank expects the Turkish economy to grow by more than 5 percent this year. “If Turkey can accelerate its vaccination campaign as promised and have 60 percent of the population vaccinated by the end of the year, growth could be even higher,” said Hakan Kara, former chief economist of the Turkish central bank, last week during a World Bank webinar. “In that scenario, the growth rate could end up at 9 to 10 percent.” By comparison, the growth forecast for the Chinese economy is 8 to 9 percent.
According to Kara, the biggest risk is that the Turkish central bank will cut interest rates too quickly, under pressure from President Erdogan, who is an outspoken opponent of high interest rates. This can lead to financial instability. Because the US central bank seems to be getting ready to raise interest rates because inflation is rising worldwide. Under these circumstances, foreign investors tend to withdraw their money from emerging markets such as Turkey, which are heavily dependent on foreign money. And if the lira comes under pressure, the Turkish central bank will not have enough foreign reserves to defend the currency.
With 5 percent economic growth in 2020, Turkey was one of the few countries in the world to avoid an economic downturn caused by the pandemic. The government kept factories open, even during the lockdowns. And the lack of financial support for affected citizens and businesses was compensated by a rise to loans. The authorities kept interest rates below inflation and urged state banks to provide cheap credit.
As a result, the total number of loans from citizens has increased by 36 percent. Since March last year, 2.3 million debtors have been added, and the average amount they owe rose from 20,501 to 26,000 liras (1,976 to 2,506 euros). The lowest income groups have been hit particularly hard. Many people depend on loans to pay their bills. In March, 151,000 people received their first credit card and 98,000 people took out their first loan.
Increase in poverty rate
“While the economic recovery at the end of 2020 has helped the labor market somewhat, many are lagging behind, especially women, young people and low-skilled workers,” the World Bank said. “This has probably hit the poor harder, along with high inflation.” The World Bank estimates that the poverty rate in Turkey has risen from 10.2 percent in 2019 to 12.2 percent last year, and warns that returning to pre-pandemic levels will be difficult.
Since President Erdogan’s AKP came to power in 2002, the Turkish economy has experienced a strong growth spurt, reducing unemployment, increasing incomes and halving poverty. But since 2013, GDP per capita in dollars has fallen by nearly 40 percent. This shows that the current economic model is unsustainable, as growth is mainly driven by government spending and cheap credit.
The growth in the first quarter “is the result of the simply unsustainable fiscal and monetary stimulus of 2020,” Timothy Ash, emerging markets analyst at London-based investment fund Blue Bay, wrote in an email to investors. “Turks continue to pay the price in the form of double-digit inflation, a weak currency, and a lower GDP per capita in dollars, making Turks feel poorer.”