Warnings of overheating sounded as Turkey’s Q3 GDP comes in at “stonking” 11.1%

Warnings of overheating sounded as Turkey’s Q3 GDP comes in at “stonking” 11.1%
Istanbul's Levent business district could be feeling the heat in more ways than one next year. / Mimar77.
By bne IntelliNews December 11, 2017

Warnings were sounded that Turkey’s economy is overheating and that there is a risk that its growth could come to a sudden halt next year, as the country on December 11 recorded a third-quarter GDP expansion of 11.1%.

The big driver was final consumption expenditure by resident households, which grew 11.7% from a year earlier. Such consumption makes up nearly two-thirds of the economy. Timothy Ash, senior sovereign strategist at BlueBay Asset Management, described the headline GDP growth figure as “stonking”. However, just prior to its release he said in a note to investors: “The problem is the quality of growth as this is mostly domestic driven. This could risk a sudden halt in growth next year if the authorities don’t manage a gradual slowdown.”

The markets are currently worried that amid double-digit inflation and a sinking Turkish lira the Turkish central bank has been unable to exercise the monetary independence needed to at will hike interest rates, given that Turkish President Recep Tayyip Erdogan has been calling for the opposite, unorthodox path—but anxieties about this have eased in the past few days ahead of the scheduled December 14 central bank monetary policy committee (MPC) meeting.

Following the failed military coup of July last year—and the brake that put on economic growth—to spur the economy Turkey upped spending across the board, hiking wages, pouring capital into investments and backstopping loans with a credit guarantee fund. But the growing current account deficit and rising inflation clearly indicate the economy is now overheating, say analysts.

In its comments on the GDP figures, Capital Economics said: "The sharp pick-up in Turkish GDP growth in Q3, to a six-year high of 11.1% y/y, was flattered by the comparison with Q3 of last year, when output was disrupted by the coup attempt. The annual rate of growth is likely to slow sharply in the coming quarters. Even so, today’s GDP data, coming alongside November’s jump in inflation, mean a rate hike at Thursday’s MPC meeting now looks highly likely." 

Fresh data also released on December 11 showed that the current account deficit now stands at $3.83bn, more than double the year earlier level. “The weird thing here though was the $2.73bn net error and omissions inflow which is hard to explain. Obviously someone was buying lira,” noted Ash. 

In further comments on the new GDP data, he concluded: “A stonking number—and even though well signposted that it would be double digit, over 11% was an incredible number. Obviously the result of low base effects [produced by the economic fall-off after the failed coup] plus the effect of various fiscal stimulus plus the credit gurantee fund. These will ease back in Q4 and into 2018, but still full year growth can easily be 6.5-7% around double the early-year estimates. The problem still is the quality of growth with private consumption and likely government investment leading the way. This does not seem sustainable.”

The lira had edged up to 3.8318 per dollar at around 1245 Istanbul-time.

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