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The Turkish domestic demand is currently quite strong as the government has executed pro-growth policies in the first quarter of 2016, including a 30 percent minimum wage rise.
Lower prices of food and energy are also helping the economy considerably, not just through household consumption, but also via narrowing of current account in the past year. Fixed investment is expected to be hit from heightened uncertainty regarding the future policy regime.
In fact the sentiment indicators, which had increased sharply after the November election, started to drop in recent months as the cabinet was re-constituted and the security situation deteriorated, said Commerzbank in a research report.
The outlook, which was quite bullish regarding investment prospects when a government with majority resulted from the November election, has been reversed now.
“We have lowered our GDP growth forecasts from c.4 percent each for 2016 and 2017 to 3.5 percent and 2.5 percent respectively”, added Commerzbank.
Meanwhile, curbing inflation has been a secondary objective for the government in the recent years, and the new government is expected to further de-emphasize it. However, the global inflation cycle is weak, and the depreciation of lira has been primarily driving Turkish inflation. Lira is likely to depreciate by about 12 percent by the end of 2016, assuming that the US Fed hikes rate in December, according to Commerzbank.
Decelerating economic growth and less severe lira depreciation is expected to drive inflation to around 7.5 percent average in 2016 and 2017. The headline CPI inflation is expected to accelerate again by the second half of 2017. Moreover, core inflation is expected to stabilize in the quarters ahead; however, it is not expected to decelerate considerably beyond 8.5 percent, stated Commerzbank.
