Over-reliant on spending
The Turkish economy has allocated more resources to less sustainable sources of economic growth. Growth from construction and private and public consumption is important, but these sectors tend to be highly cyclical. With too much consumption and inadequate saving, the high current-account deficit remains Turkey’s economic Achilles heel. The Turkish economy can only maintain this situation because more “risk-on” sentiment and a hunt for higher yields have recently lowered the pressure from the capital markets on Turkey to adjust its spending habits. More structural reform to stimulate savings and investment from home and abroad remains crucial. The current account deficit will probably stay above 4 percent of GDP this year. We expect Turkey to muddle through this year. We now expect real GDP to grow by
2.2 percent in 2017 and 2.8 percent in 2018, up from our previous estimate of -0.1 percent and 1.5 percent, respectively. We maintain our view that Turkey can sustain a real GDP growth rate of 3 percent over the medium term if it gets its house in order. However, this looks unachievable in the near term.