Türkiye’s economy expanded by more than expected in the last quarter and the whole of 2022, official data showed Tuesday, yet the pace is clouded by the devastating earthquakes this month that caused widespread destruction in the southeast of the country.
The gross domestic product (GDP) grew 5.6% on an annual basis in 2022, the Turkish Statistical Institute (TurkStat) said, above market expectations that stood at around 5.2%.
The economy started cooling in the second half of 2022 with a decline in domestic and foreign demand, partly due to a slowdown in Türkiye's main trading partners because of the war in Ukraine, which hurt exports.
The GDP expanded by 3.5% in the fourth quarter of 2022, the TurkStat said, down from a revised 4% in the third quarter and 7.8% in the second quarter.
In 2022, the country's gross domestic product (GDP) reached TL 15 trillion ($905.5 billion) last year, the data showed.
The GDP per capita was TL 176,589 ($10,655) in 2022.
Finance and insurance activities grew 21.8%, followed by the services sector, which rose 11.7%, according to the data. The only contraction was in the construction sector, which shrank 8.4%, the data showed.
Overall consumption contributed 11.5 points to annual growth, according to economists' calculations. Net foreign trade and stocks lowered it by 3 and 5.5 percentage points, respectively.
Household spending, which is estimated to account for more than half the economy, grew an annual 19.7% in 2022, the data showed.
The spending expanded by 16.1% year-over-year during the October-December period. Government spending rose 9%, the fastest pace of growth since the presidential elections in 2018.
Exports of goods and services increased by 9.1% on annual basis, while imports rose by 7.9% compared to the previous year. Outbound shipments were down 3.3% in the last quarter, while imports jumped 10.2%, the TurkStat said.
In contrast, the average GDP growth rate was 1.1% in the Organisation for Economic Co-operation and Development (OECD) area in the last quarter of 2022.
The rate was 1.8% for the European Union, 1.9% for the eurozone and 1% for G-7 countries.
The economy is expected to cool further this year, mainly due to catastrophic earthquakes that flattened a swathe of Türkiye’s southeastern region in early February, which could keep pressure on inflation and stretch the government’s budget.
Indicators before the quakes suggested that GDP growth had revived with the help of domestic demand, but risks to annual growth were now on the downside after the disaster, said Haluk Bürümcekçi, of Bürümcekçi Consulting.
"The size and duration of the earthquake zone's contribution to all sectors, particularly the manufacturing industry... will be critical in shaping the magnitude of the expected slowdown in growth this year," he said.
The likelihood of a slowdown in January was "quite high," but more robust growth may be seen in the following quarters as production gains compensate for losses in other areas, Bürümcekçi said.
To counter the slowdown, the central bank cut its policy rate by 500 basis points at the end of last year and then by a further 50 basis points to 8.5% last week to support growth after the earthquakes killed more than 50,000 in Türkiye and neighboring Syria.
The government has prioritized low-interest rates to boost exports, production, and investment and create new jobs as part of a new economic program. Dubbed the Türkiye Economy Model, the program aims to lower inflation by flipping the country’s chronic current account deficit to a surplus.
GDP growth in 2023 is expected to be 2.8%, based on the median estimate in a Reuters poll. Predictions ranged from 1.2% to 3.9%.
In a poll conducted in January, before the earthquakes, the median estimate for 2023 economic growth stood at 3%.
Expectations of 13 economists in an Anadolu Agency (AA) survey hovered between 5% and 5.4% for the year, and 2.2% and 4% for the last quarter.
Business groups and economists have said rebuilding could cost Türkiye up to $100 billion and shave one to two percentage points off growth this year.
The magnitude 7.7 and 7.6 quakes on Feb. 6 caused as much as $34.2 billion in direct physical damage, but total reconstruction and recovery costs could be twice as high, the World Bank said on Monday.
The lender also said it would lower its 2023 growth forecast by about half a percentage point from its initial 3.5%-4% estimate.
Separately, the Wall Street bank JPMorgan estimated the quake’s direct damage to buildings and infrastructure to be $25 billion.
More than 2 million people are estimated to have left the southeastern region, which accounted for close to 10% of GDP and about 16% of Türkiye’s agricultural production last year, which could drive food inflation higher.
The area accounted for 8.5% of Türkiye’s exports and 6.7% of imports. However, economists say the quakes are unlikely to affect Türkiye’s trade balance as exports and imports are expected to drop.
The quake also gives the government an additional challenge on the budget, one of the most substantial areas of the economy. Economists had estimated that the budget deficit to GDP ratio for 2023 would be around 3.5% before the earthquakes, but predictions are now rising toward 5%.
JPMorgan revised its budget deficit forecast to 4.5% of GDP for 2023 from a previous 3.5%, drawing attention to increased spending due to the disaster.
