Home and car sales have increased and shopping malls and entertainment venues appear to be quite buzzing in Turkey, even as steadfast inflation and widespread unemployment continue to haunt the country’s struggling economy. What about this seemingly contradictory trend? Are Turks throwing barbecues on the flames of inflation?
Soaring prices remain the main problem for the Turkish economy, which was already in dire straits when the COVID-19 pandemic struck early last year. After climbing to 17.5% in June, annual consumer inflation in Turkey is expected to easily reach 20% in the coming months, given much higher increases in producer prices – 43% in industry, 30% in services and 22% in the agricultural sector. The prevailing view among observers is that the large gap between consumer and output inflation will soon translate into further price increases for consumers.
The fight against inflation requires monetary tightening. In other words, Turkey’s economic management should discourage consumption and encourage savings, and the central bank should raise its current policy rate by 19% to make the ailing Turkish lira more attractive to domestic depositors and investors. foreign investors face rising inflation. Tightening the credit taps would be another inevitable measure to curb the appetite of domestic consumption.
Turkey’s central bank, however, became a department of the presidential office, and President Recep Tayyip Erdogan’s aversion to rising interest rates and the cooling of the economy dampened hopes that inflation would be brought under control. among national and foreign players.
Expectations of soaring inflation coupled with the dramatic depreciation of the lira have led many people to hold onto their savings in hard currency. Another way to protect your money from inflation is to turn it into durable goods or properties before prices rise further; hence the recent increase in sales of homes and cars. Home renovations, purchases of new furniture, and pandemic-delayed travel spending are other types of consumption driven by the specter of higher prices – for, of course, the small minority with deep pockets.
The Turkish Statistical Institute’s annual income survey, released last month, shows that around a quarter of the country’s 83 million people receive half of total income. According to a more detailed breakdown, the richest 10% receive 32.5% of total income, which means that around 8 million people are little affected by price increases. The conspicuously vibrant consumption is essentially the consumption of this affluent minority.
In June, home sales in Turkey increased by around 75,000 from the previous month to over 135,000, according to official figures. Less than 20% of these were mortgaged sales, with most buyers using their own funds. The trend is expected to continue in the coming months.
On the auto side, sales were over 310,000 in the first half of the year, up 52.4% from the same period in 2020. Sales of light commercial vehicles were also up, increasing by 67% to 85,000 over the same period. Demand for cars is also expected to continue over the next few months.
Another stimulus for consumption is the increase in the flow of foreign visitors in June following the lifting of pandemic restrictions. The number of foreign visitors is expected to increase, not least because the depreciation of the pound has made Turkey cheaper for foreigners. In the first five months of the year, only 3.7 million foreigners visited Turkey, down 14.3% from the same period last year. Before the pandemic, nearly 13 million tourists visited Turkey in the first five months of 2019.
Visitors from the Middle East have also reportedly boosted home sales, especially in Istanbul as well as neighboring Bursa and Yalova provinces, where hot springs have long been a favorite destination for Arab tourists. There are also signs that foreign demand for health tourism in Istanbul, including hair transplants very popular with Middle Easterners, could reach pre-pandemic levels.
However, recoveries in consumption that do not bring hard currency back to the country are not good for inflation. The Turkish economy is heavily dependent on imports, which feeds the demand for foreign exchange. Thus, insufficient inflows of hard currency translate into lower exports and higher exchange prices. For a while, the price of the dollar has remained above 8.5 lira amid a global financial environment that discourages foreign investors from placing money in emerging economies like Turkey. The country’s $ 190 billion external debt that is due to roll over over the next 12 months and the nearly $ 30 billion current account deficit the country needs to finance are other major factors that keep demand for foreign currency alive. foreign high. On top of all this, locals continue to view hard currency as a safe haven to protect their savings against the lira’s fall.
As a result, the rise in foreign exchange prices has been reduced to an increase in costs for Turkish import-dependent producers, which inevitably trickle down to consumer prices, even late or partially.
In sum, the masses grappling with declining purchasing power against inflation and the nearly 10 million unemployed represent a more poignant and harsh reality of the Turkish economy than those who love barbecue. Moreover, the party is unlikely to last long as the recovery in consumption threatens to create additional inflationary pressures and worsen the country’s current account deficit.