The Turkish economy grew 21.7% in the second quarter compared to the same period last year, the The Turkish Statistical Institute announced Wednesday, in what has been hailed as the highest growth rate in recent Turkish history. Despite the gigantic rate, the country’s economic outlook remains fragile amid lingering currency risks associated with President Recep Tayyip Erdogan’s pressure to cut interest rates despite inflexible inflation.

The nearly 22% increase in gross domestic product (GDP) owes much to a strong base effect in the second quarter of last year, when the country’s GDP contracted 10.3% under the impact. of the COVID-19 pandemic as households cut back on consumption, many businesses have been closed either totally or partially and closures have crippled the service sector. So the figure wasn’t exactly a surprise. Many other countries posted double-digit growth rates, even though they did not reach 22%.

Undoubtedly, the massive growth rate also owes to the economic recovery after the easing of pandemic restrictions. A boom in private consumption – the result of deferred spending during the pandemic – has been a major driver, in addition to new investment to replenish stocks depleted during the pandemic and a similar recovery in exports and tourism.

Turkish consumers – especially those in the top 20% income group – had more incentives to spend as inflation continued to rise, but interest rates remained unchanged, prompting many to rush to buy cars and other durable goods before prices rise further. Those with a lot of savings also invest in investment houses and other real estate.

At the same time, pent-up demand on foreign markets has contributed to the revival of certain Turkish exports and therefore of industrial production. The country’s tourism sector, which came to a halt in spring 2020, has also recovered, contributing to the rise in private consumption as well as to trade.

In short, the increase in domestic and foreign demand has stimulated the cogs of the industry. In a harbinger of an extraordinary rate of growth, industrial production data showed last month that industrial production, which contributes 22% of Turkey’s GDP, increased by 40% in the second quarter compared to the same period last year.

New investments have also helped boost GDP growth. The companies exhausted their stocks of raw materials and their capacities installed to meet the pent-up demand and immediately began to renew them. Commenting on the Istanbul Chamber of Industry manufacturing index, which peaked in six months in July, Andrew Harker, chief economic officer at IHS Markit, said: “Companies have shown themselves capable of rebounding quickly over the past year and appear to be on track to do so again, with a sharper increase in employment and purchasing activity helping them to cope with increasing workloads. He warned, however, that the surge in COVID-19 infections in Turkey could fuel “concerns that growth plans could be hampered again in the coming months.”

Despite the massive growth rate, Turkey’s GDP is not as impressive in dollar terms, given the dramatic collapse of the Turkish lira in recent years. Year-on-year GDP stood at $ 765 billion, or GDP per capita of around $ 9,000, a far cry from the $ 12,500 in 2013.

Moreover, a comparison between successive periods shows that the GDP only grew by 1% in the second quarter compared to the first quarter of the year, where the growth rate was 7.2%. For the Economic and Social Research Center At Bahcesehir University in Istanbul, a respected think tank studying economic trends, such signs of economic stagnation or even slump are the real aspect that needs to be highlighted.

A looming question now is whether Erdogan will push the central bank to cut interest rates in a bid to support growth in the third and fourth quarters. The next meeting of the bank’s monetary policy committee is scheduled for September 23. Inflation data for August, due for release on September 3, will be closely watched in this context.

Despite Erdogan’s claims on the contrary, inflation is unlikely to decrease. Yet Erdogan’s main strategy is to focus on growth rather than inflation, which he has failed to contain. Speculation is rife that he plans to bring the elections forward from 2023, possibly next year, in hopes of riding the wave of growth and shielding his inability to heed the inflation. Could economic growth outweigh the crushing impact of inflation on voters? This is what Erdogan is desperately betting on amid his falling poll numbers.

Eager to impress voters, Erdogan’s Justice and Development Party may inflate the year-over-year growth rate and ignore the slowdown from the first quarter, but the volatile nature of growth is certainly a source of concern for the president; hence the hope that it would push the central bank to lower interest rates in order to stimulate consumption even as inflation remains high.

Annual consumer inflation reached almost 19% in July, while producer inflation climbed to almost 45%. The trend is unlikely to have eased in August. The central bank’s key rate is also 19%, and Erdogan would take a major risk by cutting the rate in such an inflationary environment. Such a move, monetary experts warn, could trigger a new wave of dollarization and send the Turkish lira into another spin, which Ankara would struggle to contain despite a relative increase in the inflow of foreign capital and the arrival of $ 6.3 billion in support of the reserves of the International Monetary Fund.

Turkey’s currency problems have already led to a massive flight of the lira. As of August 23, foreign currency deposits held by locals amounted to $ 256 billion, of which $ 163 billion was held by natural persons, accounting for 56% of all deposits in Turkish banks, central bank data spectacle. Experts warn that the figure could easily exceed 60% amid a new dollar rush triggered by a rate cut by the central bank.

Whether Erdogan will succeed in convincing voters remains to be seen, but it is telling that the nearly 22% growth rate has not contributed to a more equitable distribution of income. Data from Wednesday shows the share of payments to employees fell to around 33% of GDP from 37% in the same period last year.