(Bloomberg) -- Turkey’s $1.2 trillion economy slowed by more than analysts expected in the second quarter, highlighting the impact of higher borrowing costs.
Gross domestic product grew by 2.5% year-on-year, compared with 5.3% the previous three-month period, Turkey’s state statistics agency said on Monday. Economists in a Bloomberg survey were expecting annual growth of 3.2%.
GDP adjusted for seasonality and calendar effects expanded by 0.1% quarter on quarter, down from 1.4% during the previous period.
The quarterly figure indicates “visible weakening” with a slowdown in domestic consumption, the main driver of economic growth, said Istanbul-based economist Haluk Burumcekci. He lowered his year-end growth forecast to 3% from 3.5%.
First-quarter economic growth was driven by domestic demand, with a higher minimum wage and expectations of further price rises fueling short-term buying. The central bank has raised its benchmark interest rate nearly sixfold to 50% since last year to rein in household spending and slow inflation, currently running at over 60%.
Domestic consumption increased 1.6% in the second quarter from the same period last year. It grew 6.8% in annual terms the first quarter. Imports slowed by 5.7% annually.
The monetary authority said last month that early indicators show domestic demand is cooling on the back of higher interest rates, and imports of consumption goods are being monitored closely to assess the behavior.
The restrictive monetary policy is hitting some manufacturing businesses, especially in textiles. Leading businessmen representing apparel makers have recently complained of weak demand abroad, high inflation and a lack of financing. Industrial sector contracted by 1.8% annually while goods and services exports barely nudged.
Treasury and Finance Minister Mehmet Simsek — who has overseen the sharp rise in borrowing costs since his appointment last year — is walking a fine line as he tries to rein in prices without pushing the economy into a deep contraction. “Preliminary indicators show that balancing in growth is continuing,” he said after the data release.
The slowdown in activity will likely be more pronounced in the second half of the year, Goldman Sachs Group Inc. economists said in a report ahead of Monday’s release. Weaker demand will help reduce inflationary pressures, but it also “raises the risk of a policy reversal, which is the main risk to our forecasts,” they said.
President Recep Tayyip Erdogan typically favored growth over price stability, stimulating the economy through ultra-cheap loans. That period ended after his reelection in 2023, when he allowed Simsek to adopt a more conventional policy mix. Still, investors remain cautious about how much Erdogan is willing to compromise on growth to maintain price stability.
Authorities expect inflation to slow to around 40% by the end of this year. August inflation data will be published on Tuesday, likely showing a slowdown of about 10 percentage points annually, mostly favored by statistical base effects.
(Updates with breakdown of data, starting in first paragraph.)
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