The Turkish economy is landing and may succeed in doing so without crashing. Which was not a given at the start. After two years of overheating, growth slowed down significantly in the second quarter, with GDP growing by only 0.1% compared to the previous quarter (+1.4% at the end of March). But it did not fall into the red, which many economists had nevertheless anticipated.
The return to economic and financial orthodoxy is therefore having the desired effects. After the 2023 elections, President Erdogan appointed Mehmet Simsek as head of the Ministry of Finance, who subsequently significantly tightened financial conditions to resolve macroeconomic imbalances. Interest rates rose from 8% to 50% to combat galloping inflation, and taxes were increased.
As a result, the potion is bitter for the Turks, but it is working. Prices, which were still climbing by 75% over a year last May, are now up 62% over the last twelve months. And, collateral but logical damage of this policy of raising rates, growth is weakening. In the second quarter, Turkish foreign trade weighed on activity, with exports falling by almost 4%. Industrial production has been marking time for three months. And domestic demand is starting to decline. The cost of credit and the good performance of the Turkish lira explain this phenomenon.
The price to pay
This is the price to pay to return to healthier growth and it is also Mehmet Simsek’s objective. “The country’s current account deficit has fallen to 2.7% of GDP in the first quarter of 2024, market sentiment has improved, international reserves have increased by $91 billion (€82 billion) since April and international credit agencies have raised Turkey’s sovereign risk rating,” the International Monetary Fund (IMF) said in its annual report on the Turkish economy published last week. The institution is still counting on growth of 3.4% this year and inflation of 43% by the end of December.
In a return to more traditional solutions, the institution is campaigning for a more restrictive budgetary policy and higher interest rates for longer to overcome inflation. In short, more marked austerity. It will indeed be difficult to reduce inflation to 5%, the target of the Turkish Central Bank at the end of 2025, without going through this. But such an economic policy would mainly result in plunging the country into a recession.
Towards BRICS membership
Erdogan’s electorate is unlikely to accept further austerity measures. And, as economist Timothy Garton Ash notes in a blog post, “some argue that the program is already too harsh, that the lira is overvalued, and that this imposes an excessive toll on key sectors of the economy such as exporters and credit-dependent sectors such as construction.” The most vulnerable sections of the population are also paying a heavy price. “With inflation, real incomes of the lowest-income workers and pensioners are starting to fall. There is real popular discontent growing in Turkey, hence the rumors of Simsek’s replacement in recent weeks,” says Deniz Unal, an economist at the Center for Prospective Studies and International Information (Cepii).
At the same time, Turkey has just applied to join the BRICS club, which brings together major emerging economies such as India, China and Russia, according to Bloomberg. This is a big leap for a country that is a member of NATO, a Western organisation by definition, while the BRICS members see themselves as an alternative to the West and democracy, but it will not surprise those familiar with the country. President Erdogan maintains ties with China and Russia, authoritarian regimes that are head-on opposed to the values of liberal democracy. And, in doing so, Turkey continues to play the role of bridge between civilisations, between the West and the East, which its geographical position clearly shows.
