Turkish economy likely slowed in Q1, private consumption to decline on high unemployment and inflation

Turkey’s inflationary pressures have bolstered. The nation’s core CPI in January 2016 had reached 9.72% y/y, the highest since July 2014, whereas headline CPI continues to be more than the target range of 3-7%. Lower oil prices have not been able to ease inflationary pressures because of a weaker lira.

Moreover, a 30% rise in minimum wage will accelerate inflation and boost inflation expectations. Turkish central bank should raise interest rates because of high inflation, but it has maintained it at 7.5% since February 2015, according to BBH.

Meanwhile, the Turkish economy continues to be weak. According to IMF, the country’s GDP is likely to expand by about 3%. But the Turkish government projects the economy to expand 4.5%. The economy is expected to have expanded more than 4% in Q4; however, it is expected to have slowed in Q1 due to increased geopolitical tensions and Russian sanctions. Russia imposed additional sanctions against Turkey, barring new Turkish construction and restricting tourism activities in Russia with banned food imports.

Turkey’s private consumption might also decline due to high unemployment and inflation. Meanwhile, Turkish external accounts are faring well; however, they are unlikely to rebound further. Despite a weaker lira, exports from Turkey remain weak. Turkey’s exports in January declined 22% y/y, the largest fall since September 2009. External account is likely to deteriorate due to Russian sanctions via tourism and agricultural exports.

With short term external debt and current account deficits the Turkish lira continues to be weak. By the end of 2015, short term external debt continued to fall to $115.6 billion. But this is 122.5% of its foreign reserves that have dropped to $92.9 billion in January.