Turkey to boost GDP 2.2% in 2012
After several years of very rapid growth, an abrupt slowdown is expected in 2012. The deceleration offers some benefits, allowing a reduction in the current account deficit and inflation.
The huge informal sector undermines policy efficacy. With half the population under 30 years of age, the appetite for consumption is formidable. Analysts predict that Turkey will become Europe’s fifth largest economy and a key trading hub between western Europe, the Middle Eastern and Asian economies by 2030.
Overview of the economy
Between 2002 and 2008, real growth of GDP averaged more than 6.0% per year, boosting output by a third. The boom was supported by strong job creation in both industry and services while labourers left the agricultural sector. Foreign investment increased many fold in this period while foreign trade burgeoned.
During 2008 the economy slipped into recession which lasted for four quarters. A precipitous drop in exports (mainly to the EU) was the major reason for the slump. Industries relying on the country’s plentiful supply of unskilled labour suffered most. A strong recovery occurred in 2010 when real GDP rose by 9.2%, making Turkey one of the world’s fastest-growing economies for the year. The momentum was sustained in 2011 when real GDP grew by 8.5%. Robust investment helped to support the economy while exports picked up in the second half of 2011. Output is now well above its pre-crisis peak.
The government’s inability to make more progress in reducing the huge informal economy weakens the efficacy of policy makers. An estimated 53% of the workforce was unregistered in 2004 and the share in 2010 was still about 44%. Policy makers have also been slow to boost competition in order to cut energy and other costs.
After gains of 8.5% in 2011, an abrupt slowdown is underway in 2012 when real GDP should grow by 2.2%. The slowdown is attributed to a more restrictive monetary and fiscal policy mix. Spillover effects from the eurozone crisis are another drag. The deceleration offers some benefits, allowing a reduction in the current account deficit and inflation, two areas which have posed persistent problems for policy makers.
Ankara is struggling to limit the credit expansion that has underpinned the economy’s quick rebound. Credit began to slow in the fourth quarter of 2011. Inflation was 6.5% in 2011 and prices are forecast to rise by 10.2% in 2012 – well above the central bank’s target rate of 5.0%. Lending has been curbed but even more policy tightening may be necessary to meet the central bank’s targets.
With half the population under 30 years of