Turkish economy to recover gradually, says EU

The European Union has revised upwards its forecast for the Turkish economy along with warnings of high inflation plus domestic and external financial risks.

The Turkish economy's growth forecast has been advanced from 2.8 to three percent for this year and from 3.2 to 3.3 percent for 2018, according to Thursday's report released by the EU.

"The strong loss in momentum that the Turkish economy experienced during 2016 is expected to reverse only gradually as uncertainty recedes during the year," the report stated. "Supported first by net trade, momentum is set to improve towards the end of the year as domestic demand benefits from improvements in monetary conditions and in confidence."

The EU report highlighted how inflation had increased in low double-digits in the first quarter of 2017 "in large part owing to the depreciation of the lira, increased energy prices, temporary factors and entrenched expectations of high inflation".

According to Turkish Statistical Institute (TurkStat) figures, consumer prices in Turkey rose 11.87 percent year-on-year in April from 11.29 percent in March while the country's Central Bank raised its inflation forecast for 2017 to 8.5 percent from a previous forecast of eight percent.

Positives

The EU report also underlined the positive sides of Turkey's economic outlook, such as remaining fiscal space, reduced domestic uncertainty, its young and growing population and depreciation of the lira in terms of foreign trade balance.

"The expected reduction in political and policy uncertainty this year is foreseen to lead to a broadening recovery of confidence. The impact of which is expected to be most visible in 2018," the report read.

On the negative side, the EU emphasized that high inflation and high unemployment, which would risk bringing Turkey close to stagflation, and high increases in non-performing loans and the external vulnerabilities built up over the years would further add to the risk.

"Finally, the strong build-up of debt by non-financial corporations may raise the concerns over debt sustainability in the corporate sector," the report stated.

Turkey's GDP, which grew 2.9 percent last year, was around 2.59 trillion Turkish liras ($856.8 billion) in 2016, compared with 2.34 trillion liras ($861.5 billion) the previous year while the country's unemployment rate stood at 13 percent in January, marking nearly four million jobless people aged 15 years old and over, according to TurkStat figures.