Growth to remain strong
Ercan Erguzel, economist, Morgan Stanley
Although we are not as positive as the consensus specifically for the 2Q17 growth print, the institutions/analysts we met upgraded their GDP growth forecasts towards 4-5%Y from 2-3%Y at the beginning of the year. Two main engines of economic growth are ongoing fiscal expansion and strong loan growth following the implementation of the CGF at the end of February, fuelling private consumption. These two growth engines are expected to remain intact in the next two years. However, when we move the forecast period from the next 1-2 years to the medium term, there seem to be some concerns due to sub-par private sector investment and lack of progress in structural reforms; these are the most important drivers of potential GDP growth through a higher contribution from productivity. Therefore, any move in that direction following the announcement of the new Cabinet may create a positive surprise. Although there was not a strong consensus, some people we met were concerned about two main repercussions of the current growth model: a rising external deficit and demand-pull inflationary pressures. Relatively tighter and more predictable monetary policy combined with declining global volatility has helped to stabilise the Turkish lira, while the public authorities have vowed to take additional steps to tame high food inflation. If we start to see any deterioration in the inflation outlook driven by demand-pull factors in addition to cost-push, bringing down consumer inflation to single-digits may take much longer than expected.