Turkey's economic growth slows in second quarter of 2014

The Turkish economy slowed sharply in the second quarter, squeezed by rate rises to defend the lira, and putting growth targets for the year in doubt, official data showed Wednesday.

"Gross domestic product increased by 2.1 percent in the second quarter of 2014 and reached 30.8 million lira," Turkish Statistics Institute (TurkStat) said on its website,

Analysts had estimated expansion of 2.8 percent.

The second quarter growth was less than half the 4.7 percent expansion in the first quarter of the year.

On a quarterly basis, output fell 0.5 percent in the three months from April to June over the previous quarter, TurkStat figures showed.

"Economic growth has lost momentum in the second quarter of 2014 due to monetary tightening, the delayed effects of macroprudential measures and geopolitical tensions," Finance Minister Mehmet Simsek said in a statement on Wednesday.

It would be hard for the government to reach its original target of four-percent growth for the whole year due to an increase in downwards risks, he added.

Simsek cited a host of contributing factors, including drought in the summer months, the ongoing economic problems in the EU countries and the geopolitical tensions in Iraq and Ukraine.

President Recep Tayyip Erdogan -- who ruled Turkey as premier for over a decade - has been credited with turning around the Turkish economy, with GDP per capita almost doubling since he came to power.

But the economy has showed signs of weakness over the past year amid domestic troubles sparked by a wide-ranging corruption scandal in December and mass street protests and investors turning against many of the world's emerging markets.

Its yawning current account deficit has made Turkey vulnerable to outside forces in recent months, particularly the United States tapering of its massive monetary stimulus and the conflict in Iraq has robbed Turkey of a major export market.

'Scope for rate cut gone'

In January, the central bank had aggressively raised key rates to halt a steep drop in the value of the the lira. Although it has been shaving them since then, the bank has made clear that it would not loosen its monetary policy until inflation comes down.

Concerned about stuttering growth, Erdogan and his allies have repeatedly pressed for cuts to bring rates back to their January levels.

Analyst however have warned that at a time of stubbornly high inflation, pushing the central bank towards a looser monetary policy would jeopardise the long-term health of the economy.

They have already revised their forecasts downward.

After the release of the date, the lira weakened and was down 0.6 percent against the dollar at 2.2065. The stock exchange was down 0.85 percent at 79,400.13.

Economists said that the economic slowdown was driven by domestic demand.

"Today's weaker-than-expected Turkish Q2 GDP data reinforce the point that interest rate hikes earlier in the year are continuing to weigh on domestic demand," said William Jackson at Capital Economics.

"Subdued growth is likely to trigger further pressure on the central bank from the government ...," he warned.

Gokce Celik, economist at Finansbank in Istanbul, also said in an emailed statement that "the slower growth is likely to increase the pressure on the central bank to deliver further rate cuts".

UBS economist Gyorgy Kovacs however ruled out any rate cut due to lingering risks.

"We believe that with a weaker lira, a stubbornly high inflation and a largely complete improvement in the current account deficit, the scope for any additional rate cuts in the central bank policy rate is practically gone," he said.