Turkey’s economic boom appears to be over, at least for the moment. Gross domestic product expanded at about 7 per cent a year between 2002 and 2007, raising output by one third. A revision of the way GDP is calculated, unveiled by the authorities this year, added a third to the size of the economy, establishing the total at more than TL750bn ($600bn).

Has Turkey thrown in
the towel?

Inflation globally is running well above central bankers’ targets. Turkey’s central bank governor on June 3 buckled under, almost doubling next year’s target from 4 to 7.5 per cent.

The change is a nod to reality: prices rose nearly 11 per cent year-on-year in May and the target has been missed for two years. But it comes at a risky time. Turkey will need up to $135bn in external financing this year, says Citi, and must retain investors’ confidence. Changing the inflation target could, paradoxically, enhance the central bank’s credibility, already bolstered by a 50-basis point increase in policy interest rates in May. But, coming just a month after Turkey’s $10bn loan deal with the IMF expired, it risks further damage.

In part, this is because inflation is not the only indicator moving the wrong way. Turkey’s current account deficit seems likely to rise to 7 per cent of gross domestic product in 2008 and foreign direct investment inflows are falling. The currency has lost more than a 10th of its real value since December.

However worrying such trends are, they seem unlikely to presage another of Turkey’s periodic crises. The underlying economy is stronger than for years. Since 2001 hyperinflation has been tamed, growth has been strong and government finances have been transformed. The budget surplus, before interest payments, is now 5 per cent of GDP and gross government debt has fallen from 76 to 39 per cent of GDP. Now the government has placed the public finances on a sound footing, it has legitimately chosen to increase infrastructure spending and to reduce the primary budget surplus.

This is a brave moment to choose to change inflation targets and loosen the fiscal reins. But it provides evidence of how much progress Turkey has made in reducing vulnerability to external shocks.

This column first appeared in the FT on June 5

Now, several factors are conspiring to reduce the pace of growth, which is expected to be only 4.5 per cent in 2008. One overriding factor may be that the economy is finding its equilibrium after several years of out-performance. Part of the expansion of 2002-07 resulted from the depths to which the economy had sunk in the crisis years of 2000 and 2001.