Growth in Turkey expected to slow in 2014, slightly recover in 2015

By Olga Rosca
@olgarosca

Economic growth in Turkey is expected to slow down in 2014 after a better-than-expected performance last year, according to the EBRD’s latest economic report published today.

Since the beginning of the year the risk premium facing Turkey has increased, in part reflecting high political uncertainty, and the higher cost of finance is expected to weigh on domestic demand and growth.

In addition, export demand and tourism income may be somewhat constrained by the Russia-Ukraine crisis.

As a result, economic growth in 2014 is now expected at 2.5 per cent, down from a January forecast of 3.3 per cent, and after 4.0 per cent in 2013.

Growth is expected to recover somewhat in 2015 to 3.2 per cent on the back of favourable base effect, opening up the space for monetary easing, and to a certain degree elevated business and consumer confidence resulting in higher contribution of consumption and investment.

The major downside risk is that Federal Reserve tapering could weigh on the flow of foreign funds to emerging markets more than expected. Turkey might take the brunt of the drain in short-term capital flows, with its still large external imbalances mainly financed through this channel.

But on a positive side, the economy proved resilient to unfavourable circumstances in 2013, with still positive net portfolio inflows, and continuing access to international markets for both public and private sectors, albeit with higher interest rates. Besides, the banking sector remains well-capitalised and non-performing loans are low.

While the Russia-Ukraine crisis is not expected to have a large impact on the growth outlook in Turkey, a further deepening of the crisis, especially if it pushes up the price of oil, would pose a downside risk.

Read the full Regional Economic Prospects - May 2014 (944KB - PDF)