Last year proved a tough ride for Turkey. Costly tension with Russia that prompted sanctions, dwindling tourist arrivals amid anxiety over terrorism and July’s bloody coup attempt slowed the economy. The economic damage was brought home when the first Turkish GDP contraction in seven years was registered in the third quarter. The Turkish lira also took a beating, losing 17% of its value against the dollar in 2016. Inflation, driven by the weaker currency, climbed into the double digits.
High inflation, steep unemployment and political uncertainties against the backdrop of a declared state of emergency all dented consumer sentiment. The consumer confidence index descended to 63.4 in December, the lowest level encountered since October 2015.
Those wishing for a quick turnaround have had their hopes dashed by the international institutions’ assessments of the Turkish economy for this year. They are not promising. The IMF said in a February report that the Turkish economy was set to grow at below-potential both this year and in 2018 due to a combination of a number of negative political and economic factors. The Vienna Institute for International Economic Studies (wiiw), meanwhile, this month downgraded its 2017 GDP growth forecast for the Turkish economy to 2.1% from its previously anticipated 3%. In another blow, Moody’s Investors Service has cut the country’s rating outlook to negative from stable.
But it’s not all bleak. The latest official data suggest that Turkish consumers are by now largely shrugging off the political and economic risks. The Consumer sentiment surprisingly improved in March. The consumer confidence index rose by 3.2% m/m in the month, following the 1.8% m/m decline registered in February.
One striking finding of the latest sentiment survey was that, with the potentially epoch-making April 16 referendum on switching to an executive presidency just around the corner, consumers had grown more optimistic about the economic outlook, the jobs market and the inflation curve.
The referendum campaign is a tense affair. The Yes and No camps are exchanging strong words, deepening the polarisation of society. The president and government’s main argument for winning over the electorate is that the proposed presidential system will bring more economic and political stability to address troubled times. The March sentiment survey suggests that consumers may be buying this standpoint. It might also be indicating that they think the government will win the popular vote.
It is difficult to otherwise explain why it is that consumers have become more confident about the economy when the country is facing a whole heap of problems all at once. Some of the economic and political troubles have been inherited from 2016 - such as the interminable Syrian conflict and the spillover from the botched putsch, including the massive purge of citizens - and some of them are new. The heated diplomatic spat with several European Union countries that absorb so many of Turkey’s exports, with Turkish President Recep Tayyip Erdogan going so far as to throw accusations of “Nazi practices” and “Nazi remnants” at Germany and the Netherlands, is a case in point.
Investors are nothing if not nervous, but some observers say that once the government gets what it has for so long longed for, via the referendum, it will cut the rhetoric, roll up its sleeves and get on with long-delayed structural reforms that will help to restore investors’ confidence in the economy. Deputy Prime Minister Mehmet Simsek on March 20 essentially told Hurriyet Daily News that they are right to think so.
Of course, only a fool would entirely trust facts and figures provided by a government agency. But, the latest consumer confidence research does appear to reflect Turkish consumers’ current mood and their expectations for post-referendum Turkey.
The atmosphere on the streets of Istanbul is not at all sombre. People are not living as if the country is on the verge of ruin or as if they are expecting something catastrophic after the votes are cast on April 16. Folk are still enjoying their nights out in the bars and restaurants, they’re still seen popping into cafes, they’re still packing the shopping malls. Some consumers right now might be a bit wary of spending money freely, but consumption has not collapsed.
Nobody will argue that consumer sentiment did not deteriorate after the coup attempt. The confidence index declined throughout the period framed by July and December last year. But, if the figures are sound, confidence is at least trickling back, perhaps substantially due to post-coup attempt measures the government has undertaken to boost consumption. In February, for instance, it removed the special consumption tax on white goods for a three-month period running until April 30, while also cutting VAT on furniture. White goods sales rose by 32% y/y in February.
Clearly, there is nothing domestic consumers can do about the lack of confidence in security that is keeping so many foreign tourists away from Turkey. And accusations of Nazism from the head of state will have done little to encourage German and Dutch holidaymakers that Turkish destinations are tourist spots where they’re guaranteed a warm welcome.
Istiklal Avenue – to many foreign visitors a beloved, elegant pedestrian street in the heart of Istanbul, complete with terrific night life until recently – is something of a sorry sight nowadays. The lack of foreign tourists is painfully visible. A number of well-known brands, such as Starbucks, Pizza Hut, the Turkish House Café restaurant chain, textile brands Columbia and Camper, and consumer electronics retailers MediaMarkt and Teknosa, have closed up shop. Sabah, a pro-government daily, has taken to blaming “the greedy property owners” for the decline of Istiklal Avenue. The newspaper has a point, but high rents cannot alone explain the shop closures.
If Erdogan’s harsh rhetoric against Europe is merely a play to whip up enough nationalist votes to swing the referendum his way, and he does go on to triumph in the vote, he’ll likely have to put in some hard overtime to ensure his victory is not pyrrhic. On March 24, he declared that after the referendum Ankara would look to maintain EU economic relations while reviewing political ties. Some Europeans might be reluctant to forgive and forget how, in their eyes, he has so crudely overstepped the mark. Pointing to this concern, on March 18 German Foreign Minister Sigmar Gabriel told Der Spiegel that Turkey is undoubtedly further away than ever before from becoming an EU member.
But Germany, for instance, is Turkey’s biggest export market (bilateral trade volume between Turkey and Germany was $35.48bn last year). It is hard to see how everything can ever be rosy in the economic garden if relations with the Germans and other major European powers are not repaired, despite the much improved picture where Russia is concerned. A sustainable recovery in consumer optimism, and spending - which presently accounts for nearly 60% of national