Turkey´s Economy Surged 11% in Quarter

Country´s Rapid Growth Outpaced China and Argentina, Despite a Falling Currency and a Struggling Stock Market

By MARC CHAMPION and JOE PARKINSON

Bloomberg

As Turkish manufacturers produce more, they also import more because they rely on semifinished components. Above, employees working earlier this year at the Karsan Otomotiv Sanayii AS factory in Bursa, Turkey.

ISTANBUL—The Turkish economy grew by 11% in the first quarter, outstripping China and confirming Turkey as Eurasia´s rising tiger

 

Thursday´s official growth figure, compared with the year-earlier period, easily beat market expectations, at a time when many of Turkey´s neighbors in the Middle East and Europe struggle with political turmoil and bailouts.

"In growth, we passed China and Argentina, we became No. 1 in the world," Prime Minister Recep Tayyip Erdogan boasted in response to the figures Thursday, as he addressed lawmakers from the ruling Justice and Development Party, or AKP, in Ankara. China and Argentina posted 9.6% and 9.9% growth, respectively, for the quarter.

Turkey´s hot economy stands in contrast with those of most neighbors in the European Union, in particular Greece, whose leader last week called on his citizens to emulate the success of his country´s old rival in bouncing back from economic adversity. Rapid growth also swept Mr. Erdogan to re-election June 12, cementing his position at the head of the region´s emerging political and economic power.

But in what is fast emerging as a Turkish paradox, foreign investors aren´t rushing to snap up assets.

A key concern in markets, economists say, is what action the new government will take to control a ballooning current-account deficit that is above 8% of gross domestic product and rising quickly—an imbalance seen as a sign of overheating, despite relatively benign inflation numbers.

Thursday´s statistics also included trade figures for May, which saw the trade deficit double from the same month last year, adding to the current-account imbalance. Imports to Turkey expanded by 42.6%, almost four times as fast as its exports at 11.7%, according to Turkstat, the state statistics agency.

"Turkey´s economic future is bright…but it needs a new growth model, not tomorrow, not today, but yesterday," said Emre Alkin, an Istanbul-based economist. He contributed to a recent 350-page strategy report, commissioned for the government, on how to boost Turkish exports and rebalance the economy.

Turkey´s growth until now has been dominated by expansion in the financial, retail and construction sectors, driven by rapid demand and credit growth, said Mr. Alkin. Turkey´s banking sector is solid, but the country´s consumption-driven model, as with Spain and China, no longer looks sustainable in the long term. Turkey, he said, has to lower costs, produce more, import less and move up the value chain.

One sign of investor nervousness is that the Istanbul Stock Exchange has been one of the worst performers among emerging markets this year, down by 9.75% since early May. Currency traders, meanwhile, have been selling off the lira, which has fallen nearly 19% since November.

Foreign investors committed more money to economies such as Poland, Germany and Russia—all of which grew healthily in the first quarter, if at less than half Turkey´s pace—and China. Turkey attracted foreign direct investment valued at 1.3% of GDP last year, compared with 2.1% for Poland, 2.8% for Russia and 8.1% for China, according to data from their respective central banks.

In Istanbul´s newest mall, Demiroran, a 12-story complex opened with fanfare on the city´s main thoroughfare earlier this year, shoppers seemed unconcerned or unaware of any risk to a boom fueled by 42% growth in low-interest consumer credit last year.