Turkish economy likely to expand 3.5 pct year-on-year in 2018 – Danske Bank

Turkey’s economy is showing evident signs of overheating. The output gap is closed and inflation continues to be in double-digit territory, while the current account deficit continues to widen. The IMF’s article IV stated that Turkey’s potential growth is 4 percent, while the economy expanded 7.3 percent year-on-year in the fourth quarter of 2017 and 11.3 percent in the prior quarter. Yet, looking at the current account deficit excluding gold and energy, it has rebounded. But industrial production growth has begun moderating because of slowing domestic demand, noted Danske Bank in a research report.

Slowdown in loan growth, tightening monetary policy, the rising cost of construction and more moderate private consumption growth, along with shrinking fiscal growth are expected to be a drag on the economy.

“We estimate Turkey’s GDP will expand as follows: +3.5 percent y/y in 2018 (consensus +4.2 percent y/y), +3.0 percent y/y in 2019 (consensus 4.0 percent y/y) and +2.7 percent y/y in 2020 (consensus +3.8 percent y/y)”, said Danske Bank.

The important concern for the Turkish economy is the large external financing need, estimated at 26 percent of GDP annually. While a wide current account deficit has been a long story in the Turkish economy, it has intensified structurally in recent years, when the country lost its big markets for exports such as Iraq, Libya and Syria. The nation’s high dependence on energy imports is another major factor weighing on the economy. Moreover, the expansionary nature of current macroeconomic policies giving rise to fast import growth has increased external imbalances further.

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