Turkish Growth Slumps to Slowest in Six Years

By Steve Bryant

Sept. 10 (Bloomberg) -- Turkey's economy grew at the slowest pace since the country emerged from a recession six years ago as higher interest rates and the threat of political instability hurt consumer spending.

Gross domestic product growth slowed to 1.9 percent from a revised 6.7 percent in the previous quarter, the state statistics office in Ankara said on its Web site today. The economy was expected to expand by 3.7 percent, according to the median estimate of 15 economists surveyed by Bloomberg.

The pace of growth in the European Union membership candidate slowed as the global credit squeeze damped demand in export markets and the central bank added to the cost of borrowing. Consumers also lost confidence as the ruling party faced the prospect of closure following allegations it was too Islamist.

``We're seeing the impact of subprime here, as well as the political problems at the time,'' said Ozan Gaziturk, an economist at lender Sekerbank TAS in Istanbul. ``In structural terms, it's getting harder for Turkey to grow and it really looks as if we're sacrificing some growth for the fight against inflation.''

Turkish shares extended their losses after the figures were announced. The benchmark ISE National 100 index fell 0.95 percent to 39,745 at 11:40 a.m. in Istanbul.

Interest Rate

The central bank added a total of 1.5 percentage points to its benchmark rate in May, June and July, taking it to 16.75 percent. The bank wants to slow inflation to 7.5 percent in 2009 from 11.8 percent in August. The benchmark rate is the highest among 59 countries tracked by Bloomberg.

``The third and fourth quarters may be even worse than this,'' said Haluk Burumcekci, chief economist for Fortis Bank AS in Istanbul. ``On the face of it a slowdown in growth would support an easing of rates but the bank is going to be watching many other things, including the currency.''

The lira has lost more than 4 percent of its value against the dollar this month. A weaker lira drives up the cost of imports, adding pressure to inflation.

Turkey's official growth target this year is 5.5 percent, though the global credit squeeze is likely to curb economic activity as Turkish banks often fund domestic lending by borrowing abroad. GDP will probably increase between 4 percent and 4.5 percent, Finance Minister Kemal Unakitan said on June 11.

Consumer confidence fell every month of the second quarter as interest rates rose and the ruling Justice and Development party, which has presided over more than six years of growth, faced closure in a case at the Constitutional Court. The index of confidence in June hit its lowest level since the measure was launched in 2002.

The court in July stopped short of closing the ruling party, opting to warn it not to undermine the country's strict separation of religion and politics.

Industrial production growth slowed to 3.2 percent in the second quarter from 7.1 percent in the first three months of the year. Exports jumped 35 percent in the quarter compared with a year earlier, after expanding 44 percent in the first quarter.

To contact the reporter on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net.