Reuters survey of interest, inflation and growth

The Turkish economy is expected to grow 2.7 percent this year, below historical averages, following the slowdown in export markets and the devastating earthquake, while inflation is expected to maintain its high course rising after of tax and wage increases.

Gross domestic product (GDP) growth projections for 2023 from 36 economists polled by Reuters were between 1.2 percent and 4.5 percent.

In the survey, the median growth projections were 2.8 percent for 2024 and 3.8 percent for 2025.

INFLATION WILL RISE AGAIN

Under the medium-term program announced last year, the government forecast growth to be 5.5 percent in both years.

Despite the expected slowdown in economic activity last year, the economy grew 5.6 percent supported by domestic demand.

Earlier this year, economists had forecast that economic growth would remain below the 5 percent average of recent years, following earthquakes that left millions of people homeless in the southern and eastern regions of the country.

After rising to a 24-year peak of 85.51 percent in October last year, the CPI began to fall on the back of the high base effect and the flat course of the LT ahead of the election.

The 38.21 percent annual level announced in June is the lowest level seen this year, and is expected to rise again for the rest of the year.

SINGLE-DIGIT INFLATION TARGET FOR THE 2025 DREAM

Although the median 2023 year-end CPI estimates from 20 surveyed economists are at 46.4 percent, the estimates are being revised upwards due to more than 20 percent depreciation in TL and various tax increases since early of June.

Economists signaled that it is inevitable that they will revise their year-end forecasts from 50 to 60 percent, perhaps even more, as they await the double-digit monthly CPI for July.

Inflation is expected to close at 31.1 percent and 21.8 percent in 2024 and 2025, respectively.

According to the survey, the goal of the government and the Central Bank (CBRT) will not reach the single-digit inflation level until 2025.

THE INCREASE IN TAX RATES AFTER THE ELECTION IS EFFECTIVE

10 percent in July with the effect of the increase in taxes on cigarettes on fuels and the new depreciation in TL after the elections held in May. Pending CPI increase economists are also revising their year-end forecasts upwards.

In the research note published by Citi, it was stated that after the depreciation of the TL and the increase in the minimum wage, inflationary pressure increased and annual inflation could be around 50 percent by the end of the year.

“We believe that the next inflation trajectory will likely be more challenging than the CBRT predicted. The price developments reinforced our view that the deterioration in inflation dynamics is continuous and non-cyclical…Turkey’s trend inflation, which used to be around 10%, is now estimated at 30%.

INTEREST ON THE POLICY IS EXPECTED TO INCREASE TO 25 PERCENT

Economists who participated in the survey expect the CBRT, which has refocused on price stability, to raise the policy rate from 15 to 25 percent by the end of the year.

According to the survey, the policy rate is expected to remain at similar levels in 2024.

The CBRT raised the policy rate to 15 percent with a 650 basis point increase in interest rates in June and stated that the tightening would continue until there was a significant improvement in the inflation outlook.

The interest rate increase was perceived as the most important sign of the abandonment of the policies pursued under the leadership of President Tayyip Erdoğan, with the aim of supporting growth and investments with negative real interest rates.

CURRENT LOSS EXPECTATIONS

According to the median estimates of the 17 economists surveyed, the current account deficit is expected to be 4.4% of gross domestic product (GDP) in 2023, 3% in 2024, and 2.3% in 2025.

In a note released by Capital Economics, which participated in the survey, “The policy change seems to have had the desired effect. The trade deficit is narrowing thanks to low imports… The depreciation of the TL, the reduction of the trade deficit and the increase in the flow of capital helped the CBRT to increase its reserves… Taking into account the fragile starting point of the economy, policy makers have a long way to go. (Reuters)