The first half is over, though the final whistle might reveal a truer picture
The Turkish economy has completed the first half of 2017. Considering performance in the first quarter, growth might speed up in 2017. But it is obvious that it won’t surpass pre-crisis levels of 6%. It is expected that the economy, which grew by 2.9% in 2016, will grow by 3.5% in 2017. Actually, it’s a distressing amount but as long as an early election is odds on, there’s no chance the political rulers will make no concessions on growth. On the contrary, it wouldn’t be wrong to say that government will mobilize all its resources in an attempt to support growth to remain at a high level.
That insight allows us to make two rather more realistic predictions: whatever heights are reached by the end-of-year growth in 2017, they will be matched by inflation and the budget deficit. The general economic outlook makes us believe that is a huge possibility. However, it is anticipated that the budget deficit of 1% of GDP last year will increase to 2.4% by the end of this year. More importantly the primary surplus, which has been kept in the positive zone by political rulers since the start, might turn into a primary deficit of a higher level. Such a diffuse trend in public finance will also push inflation upwards. And a public deficit is not the only factor set to feed inflation this year. A credit swell due to new measures will also contribute to that increase. Ultimately, a reasonable prediction seems to be that annual inflation, which was 8.5% in 2016, may increase to 9% or more by the end of 2017.
The acceleration of inflation will negatively influence two more factors, one of which is interest rates. Risk conditions, expanding demand for credit and other similar factors will certainly have an increasing effect on interest rates but higher inflation will also contribute to that upward trend. We’ve already been experiencing the compound effect of such factors pushing interest rate upwards since the beginning of the year. I strongly believe that particularly the upward trend of interest rates on bank credit confirms this connection. Thus, the consensus is that bank interest rates, which were at 8.5% at the end of 2016, will probably increase to 12.5% in 2017. That indicative DIBS (public fixed income securities) interest is expected to rise from 10.8% to 12% is also another sign that signifies that the dominant trend on interest rates in 2017 will be upwards. There is also an expectation of a modest rise in the current deficit/national income ratio.
As a result, 2017 will in many ways be a mirror image of 2016. The economy will again deliver a weak performance, which means Turkey will once again lose time and resources.