Turkish economy likely to expand 1 pct this year, inflation to reach 10 pct in months ahead, says Commerzbank

The Turkish economy was sharply impacted from the disruption of the attempted military coup in July 2016. The third quarter economic growth had contracted 2.7 percent sequentially and the PMI had dropped. But since then, the manufacturing data indicated certain stabilization. Nevertheless, risks were rising as domestic demand was softening before the attempted coup. The slowdown was due to declining fixed investment as political and security concerns had increased in the preceding year.

Currently, the main sources of uncertainty are the emergency rule, which might be extended again, the political system heading for a major change to a presidential system. Also, the ‘purge’ of the parallel network is currently going on that has resulted in serious conflict with the EU about the state of democracy in Turkey and the EU parliament even raised the issue of suspending EU accession talks, noted Commerzbank in a research report. Furthermore, Turkey is greatly involved in raising military operations in Syria and Iraq. Lastly, major credit rating agencies have downgraded Turkey to junk in the third quarter that has broadened the CDS-spread and increased the cost of capital.

“We have lowered our 2017 GDP growth forecast from 1.9 percent to 1 percent, and our 2018 forecast from 2.8 percent to 2.1 percent following the publication of Q3 GDP data”, added Commerzbank.

Meanwhile, a progrowth push from the Turkish government is expected to broaden the budget deficit in 2017. These factors, along with the weaker lira might spur inflation. Inflation is expected to reach 10 percent in the months ahead from the 7 percent recorded in the third quarter. However, due to the wide open output-gap, core inflation is expected to rise less sharply, particularly if the central bank is compelled to tighten the monetary policy soon, stated Commerzbank.