Economic overheating continued in Q1, with real GDP rising by +7.4% y/y. But Q1 growth was unbal-anced, driven by strong consumer spending (+11% y/y), fixed investment (+9.7%) and a build-up in inventories (+2pp). Vigorous domestic demand also drove up real imports (+15.6%) while exports grew barely (+0.5%) so that net exports subtracted -4.5pp from Q1 growth. Moreover, the current account deficit continued to widen, posting -USD5.4bn in April, taking the 12-month rolling shortfall to -USD57bn (more than -6.5% of GDP). Crucially, the strong Q1 growth predated the recent financial market turbu¬lence. We expect a sharp slowdown in the coming quarters as a result of the TRY depreciation, rising inflation and tighter financial conditions. The recent drop in the Manufacturing PMI (46.4 in May) and deceleration in industrial output growth (+6.2% y/y in April, after +10% in Q1) underpin our expectation. Last week’s 125bp monetary policy rate hike to 17.75% (bringing the cumulative hike to 500bp in the last six weeks) brought only short-term relief – meanwhile the TRY has lost more than the initial gain after that hike. The crucial thing is now what happens to policymaking after the elections on 24 June.
