Turkey: Country Economic Forecast: 10 Apr 2013

The economy ended 2012 on a weaker note than we had expected, with seasonally adjusted GDP flat on the quarter rather than rising by 0.6%, held back by weak domestic demand. However, most of the monthly data suggest that activity has strengthened in early 2013. Business surveys have painted a reasonably reassuring picture, while industrial output has risen above its November peak and seasonally adjusted imports rose strongly in both January and February - indicating a clear pick-up in domestic demand after a lengthy period of stagnation. This recovery should gain strength through the rest of this year and into 2014. In March, lending interest rates to both companies and households were at least 330bp lower than in June 2012, leading to faster credit growth and spending. In addition, the background of a decline in global uncertainty, a gradually improving external background and a strong domestic equity market should lead to rising exports and increased investment. Notwithstanding this, the sluggish end to 2012 means that we have lowered our 2013 GDP growth forecast to 3.5% from 4.3%, although we still expect growth of over 5% a year in 2014-16. If the improvement in the economy develops as expected, then the central bank will need to start tightening overall monetary conditions through 2013H2, either by raising interest rates or by hiking bank reserve requirements.