Turkey's economy shrank by 1.8% y/y in the third quarter of 2016, registering the first annual contraction since Q3 2009, data from statistics office TUIK showed on December 12.
The contraction was much sharper than market expectations for a drop of 0.5% y/y suggesting analysts are far too optimistic on the outlook and growth in 2016 and 2017 might be weaker than expected. The sharper-than-expected contraction in GDP sent the lira down. The currency was trading at 3.4981 per dollar ahead of the data release but weakened to 3.5411 as of 10:30am Istanbul time. The main stock exchange index, BIST-100, fell 0.3% on the disappointing data.
The Q3 decline probably marks the low point of the economy’s coup-induced slump, analysts at Capital Economics said in a note. “ Nonetheless, today’s data support our view that growth will be much weaker than most anticipate. Our growth forecast of 1.8% next year sits right at the bottom of the consensus range, although even this now looks too strong,” the analysts suggest.
The government in Ankara is confident that economic activity will pick up in the final quarter of the year, supported by a raft of measures it announced last week. According to official forecasts, the economy will expand at 3.2% this year and growth rate will accelerate to 4.4% y/y in 2017.
The OECD, however, is more downbeat on growth prospects as it cut in November its GDP forecast to 2.9% for 2016 from 3.9% expected previously. The organisation also slashed its growth estimate for next year to 3.3% from 3.7%. “The outlook is subject to above-average special risks, as developments related to increased military activity across the southeastern border and next year's constitutional referendum might affect household and business confidence, and will bear on consumption, investment and growth,” the OECD warned.
The ruling AKP party submitted on December 10 a bill to parliament on constitutional reforms that would pave the way for the introduction of an executive presidency. The government hopes to hold a referendum on the presidential system by the summer, sometime between March and May next year. The referendum will take place at a time when global economic environment is expected to become more challenging for a number of reasons for emerging market economies.
The main driver behind the poor economic activity in Q3 was the 3.2% y/y decline in households’ final consumption that accounted for 59.8% of GDP in the third quarter of 2016, in a sign that the failed July 15 coup attempt weighed heavily on consumer spending and confidence. Households’ durable goods consumption fell 7.8% y/y in Q3 after rising 7.6% in the previous quarter, while the increase in semi durable goods spending slowed to 1.1% from 13.6%, TUIK data showed. Non-durable goods consumption declined by 5.4% y/y, to follow a 3% y/y drop in Q2.
Gross fixed capital formation that increased 4.7% y/y in the previous quarter fell by 0.6% y/y in Q3, underlining the impact of the post-coup developments on business sentiment, but the 23.8% y/y increase in government expenditure prevented a larger decline in investments.
Exports declined by 7% in Q3, after staying broadly unchanged in Q2, while imports growth slowed to 4.3% y/y from 9.1% y/y. The Turkish Exporters’ Assembly (TIM) reported a 5% y/y increase in exports in November, the first rise in three months. It remains to be seen whether the recent decline in the value of the lira will help Turkey recover its exports in the coming months.
On the production front, the agriculture sector’s output contracted 7.7% in the third quarter, deepening from a 5.6% y/y decline in the previous two quarters. Industrial production fell 1.4% y/y with manufacturing output contracting 3.2% y/y in Q3. The construction sector expanded by 1.4% y/y in the quarter, easing from 15.7% y/y growth recorded in Q2, while real estate activities increased 3.7% y/y versus a 5.2% hike in the second quarter. TUIK reported a 1.7% y/y decline in financial and insurance activities that grew by 12.7% y/y in Q2. The contraction in the services sector was a sharp 8.4% y/y, widening from the previous quarter’s 0.8% y/y decline.
TUIK last week said it changed the way it calculates GDP and it would use 2009 as the base year to estimate the country’s national income. As a result of this change, 2015 growth was revised up to 6.1% from a previously announced 4%, while per capita income was updated to $11,014 from $9.257. “These revisions make some of Turkey’s macroeconomic variables look healthier. The current account deficit now stands at around 4.0% of GDP, rather than 4.5%. Meanwhile, fixed investment looks considerably higher at just below 30% of GDP, compared with under 20% before,” Capital Economics said. “But these don’t change anything on the ground: the lira has been one of the most vulnerable EM currencies to shocks and the economy still has a productivity problem.”
|Turkey's Annual GDP Growth Sectoral Breakdown (%)|
|A- Agriculture, forestry and fishing||-5.6||-5.6||-7.7|
|J- Information and communication||4.8||6.7||2.0|
|K- Financial and insurance activities||8.9||12.7||-1.7|
|L- Real estate activities||4.3||5.2||3.7|
|MN- Professional, administrative and support service activities||7.3||12.8||1.4|
|OPQ- Public administration, education, human health and social work activities||5.2||4.2||5.9|
|RST- Other service activities||2.7||0.7||0.5|
|Gross domestic product (purchaser's price)||4.5||4.5||-1.8|