by Yeliz Candemir - Turkey's economy grew less than expected in the second quarter because of weak domestic demand.
The news, announced by the Turkish Statistical Institute on Wednesday, suggests the government may miss its 4% economic growth target this year. The currency and stocks fell on the news while bond yields rose.
Gross domestic product rose by an annualized 2.1% in the second quarter, according to the institute, below the 2.5% rise forecast by economists surveyed by The Wall Street Journal. That reflects a setback from a 4.7% growth rate, revised up from 4.3%, in the first quarter. The statistics agency revised Turkey's 2013 economic growth to 4.1% from 4%.
On a calendar- and seasonally-adjusted basis, Turkey's economy contracted by 0.5% in the April through June period, compared with the first three months of the year, indicating the first contraction since the first quarter of 2012.
The slowdown in economic activity was the result of the central bank's monetary tightening, the slowing EU economy hurting exports, and geopolitical tensions, Finance Minister Mehmet Simsek said in a statement following the data release.
"Drought in the summer months, ongoing economic problems in the EU countries and geopolitical tensions due to Iraq and Ukraine increase risks that growth may fall short of [a targeted] 4% this year," Mr. Simsek said.
After the data, the Turkish lira weakened by 0.8% against the dollar to trade at 2.2140, hitting the lowest level against the greenback since March 26.
The currency is also under pressure, along with many of its emerging market peers, from the possibility of more cutbacks in the U.S. Federal Reserve's bond buying program, to be determined by the meeting of the Federal Open Market Committee next week.
The lira selloff spread to Turkish stocks and bonds. Turkey's two-year government bond yields rose to 9.23% from 9.05% early Wednesday. Yields rise as prices fall. Meanwhile, Turkey's main BIST-100 stock index dropped more than 1%.
"Today's weaker-than-expected Turkish…data reinforce the point that interest rate hikes earlier in the year are continuing to weigh on domestic demand," said William Jackson, an economist at Capital Economics. "The poor figures are likely to result in further pressure on the central bank to cut interest rates. But large external financing needs, and high and rising inflation, mean that looser policy seems unlikely," Mr. Jackson said. He forecast Turkey's 2014 GDP at 2.5% this year and 2% in 2015.
Turkey's central bank in August unexpectedly slashed its overnight lending rate by 0.75 percentage point to boost domestic demand amid mounting political pressure, despite inflation remaining above target. Policy makers in Ankara held the one-week repo rate steady following a 1.75 percentage point cut between May and July. The central bank's move was a reversal of its dramatic rate hikes at an emergency meeting in January, when it more than doubled its benchmark rate to shore up the lira.
Recep Tayyip Erdogan, Turkey's new president who served as the country's prime minister for 11 years, has repeatedly called on the central bank to cut interest rates to stimulate the economy and attract investment, arguing—in the face of economic orthodoxy—that high interest rates spur high inflation.
The breakdown of the GDP data showed Wednesday that consumer spending just rose 0.4% on the year in the second quarter, compared with a 3.2% increase in the first quarter. The contribution of net exports to economic expansion rose to 2.9% in the second quarter from 2.6% in the first quarter.
"Slower growth is likely to increase the pressure on the central bank to deliver further rate cuts; however, the inflation outlook, geopolitical risks and global liquidity conditions clearly call for the opposite," said Gokce Celik, an economist at Finansbank in Istanbul. "Consequently, unless next week's Fed statement eases the overall market sentiment, the central bank will not be able to find the opportunity it is looking for to cut rates further."
Published on Wall Street Journal
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