Turkey’s second-quarter growth disappoints as it weakens more than expected

Turkey’s second-quarter growth disappoints as it weakens more than expected
By bne IntelliNews September 9, 2016

Turkey’s economy expanded by 3.1% y/y in the second quarter of 2016, easing from 4.7% in the previous three months as domestic demand weakened, data from statistics office TUIK showed on September 9. 

The reading was a disappointment to the market as analysts were looking for a GDP growth of 3.4% in April-June, raising more questions about the performance of the $720bn economy in the remainder of the year. What is more worrying, the slowdown predates July’s coup attempt, which already seems to have disrupted activity, analysts at Capital Economics write in a note.

“Overall, we think there’s a very real possibility that GDP may contract in q/q terms in the third quarter,” the analysts suggest. “Today’s data mean the risks to our growth forecast for this year of 3.3% are now skewed to the downside. Growth of 2.8-3.0% now looks more plausible.” 

The government in Ankara targets 4.5% growth for this year.

The lower-than-expected GDP figures will provide the central bank with necessary arguments for making a case for further easing despite the stubbornly high inflation. Actually, the central bank has been injecting more liquidity to the financial markets for some time to boost demand.

On a seasonally and calendar adjusted basis, GDP edged up 0.3% from the first quarter, when it rose 0.7% q/q. The economy expanded at 3.9% in the first half from a year ago.

Households’ final consumption, which accounted for 67% of national income, increased by 5.2% y/y in the second quarter, weakening from the 7.1% y/y rise registered in the first three months of the year. Government expenditure growth accelerated to 15.9% y/y from 10.9%, partly compensating for the weaker household demand.

In a worrying sign, gross capital formation contracted 0.6% y/y in Q2 after remaining flat in the previous quarter. Private investments fell by 1.6% y/y, to follow a 0.8% y/y decline in Q1. Export growth weakened to 0.2% y/y from 2.4% y/y in Q1. The pace of import growth edged up to 7.7% in Q2 from 7.3% y/y in Q1. The government says it is working on a set of measures to increase the weight of investments and exports.

On the production front, industry grew 3.9% y/y in Q2, after expanding 5.7% y/y in the previous three months. The key manufacturing sector registered an output increase of 3% y/y, versus 5.7% in Q1. Recent indicators have not been very promising too, pointing to a weaker manufacturing output: industrial production contracted sharply in July and the PMI index fell in August to its lowest level since early 2009.

The construction sector’s 7% y/y growth outpaced the previous quarter’s 6.5%, TUIK data also showed. The government is now trying to stimulate house demand with a number of measures, calling on local banks to cut interest rates on housing loans and reducing the VAT on home sales.

“I guess it [GDP growth] could have been worse - sub 3 per cent and I think there would be more focus/expectations of Moody’s using that as the smoking gun for them to pull the trigger on a downgrade,” Tim Ash at Nomura commented on the growth figures. “Not sure this number is decisive from a rating perspective.”

Lower growth, a smaller current account deficit also helps the central bank sell a rate cutting agenda which could support bond inflows, according to Ash.

Real GDP growth by Sectors
(%) 2014 2015 Q1/15 Q2/15 Q3/15 Q4/15 H1/16 Q1/16 Q2/16
Agriculture, forestry and fishing -2.1 7.6 3.9 7.7 11.4 2.8 0.3 2.4 -1.0
Industry 3.5 3.3 0.4 4.0 1.5 7.2 4.8 5.7 3.9
   Mining and quarrying 5.6 -2.3 -8.1 -5.0 -2.6 6.0 2.1 2.7 1.6
   Manufacturing 3.7 3.8 1.2 4.8 1.3 7.8 4.3 5.7 3.0
   Electricity, gas, steam and air conditioning supply 4.1 2.4 1.3 2.0 1.6 4.0 4.4 3.6 5.2
   Water supply, sewerage, waste management and remediation activities 10.8 10.4 6.8 8.8 12.9 12.7 9.6 8.7 10.5
   Construction 2.2 1.7 -2.7 1.9 2.0 5.4 6.7 6.5 7.0
Services 4.3 4.8 4.0 4.1 5.0 6.1 4.3 5.0 3.6
   Wholesale and retail trade 1.9 2.1 1.1 2.3 0.3 4.6 4.4 5.5 3.4
   Transportation and storage 3.1 2.9 1.1 2.1 2.3 6.0 2.3 3.6 1.1
   Accomodation and food service activities 2.8 4.6 5.0 2.7 6.0 3.5 -6.3 -0.9 -11.4
   Information and communication 3.3 3.3 9.2 -1.1 1.5 3.7 6.8 2.4 11.4
   Financial and insurance activities 7.3 10.0 6.7 9.9 13.6 9.8 6.0 6.5 5.5
   Real estate activities 2.8 2.6 3.1 3.0 2.8 1.5 3.5 3.4 3.7
   Professional, scientific and technical activities 10.9 11.4 14.1 10.2 10.2 10.6 8.6 8.9 8.2
   Administrative and support service activities 5.7 5.3 6.3 4.8 2.6 6.8 5.8 7.1 4.2
   Public administration and defence; compulsory social security 2.4 2.2 -0.6 0.5 5.1 3.8 4.4 4.4 4.4
   Education 6.5 5.4 7.1 5.1 3.2 5.9 5.6 5.7 5.5
   Human health and social work activities 5.6 3.1 5.2 2.3 2.1 2.3 3.6 4.4 2.7
   Arts, entertaintment and recreation 6.9 5.3 2.6 5.7 4.5 8.6 2.4 3.8 0.7
   Other service activities 2.2 0.0 0.4 -0.2 -0.4 0.3 0.1 0.3 -0.2
   Activities of household as employers 2.8 -1.4 0.9 -5.2 -5.4 1.6 0.6 -2.0 5.1
Sectoral total 3.4 4.6 2.8 4.3 4.8 6.2 4.2 5.1 3.4
Financial intermediation services indirectly measured 7.3 14.4 9.6 15.8 18.3 13.7 7.9 9.7 6.2
Taxes-subsidies 2.6 8.4 6.5 8.6 7.9 10.3 4.4 5.6 3.3
Gross domestic product (Purchaser's price) 3.0 4.0 2.5 3.7 3.9 5.7 3.9 4.7 3.1
source: tuik

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