Turkey is on the road to recession and stagflation analysts were quick to reiterate on September 10 even though the latest GDP figures for the country showed second-quarter growth of 5.2%.
The overheating economy, beset by a currency crisis, is rapidly losing steam, leading Jason Tuvey at Capital Economics to conclude in a note: “The Turkish economy grew at a strong pace of 5.2% y/y in Q2 but the monthly activity data show that there was a loss of momentum towards the end of the quarter. More timely figures point to a steep recession at the start of Q3.”
In another response to the GDP data, Timothy Ash at BlueBay Asset Management, said: “Meaningless print really. All the action will be seen in the third quarter given the marked devaluation in the lira and the sudden stop to the economy seen since then. This print just underlines the story of an overheating economy going into the June elections [in which the presidential contest was won by President Recep Tayyip Erdogan].”
Tough times on the growth front also lie ahead in the eyes of Muhammet Mercan, ING’s chief economist for Turkey, who said: “Given that increased financial volatility is weighing on sentiment, the likely difficulties in external financing, an ongoing uptrend in inflation and already sharp monetary tightening since early 2018 with likely further steps, a strong underperformance in growth could well be seen in the second half, likely turning to negative on a sequential basis.”
All eyes are now on the Turkish central bank which, provided it can defy political pressure, has the option of bringing in a radical rate rise at its monetary policy committee (MPC) meeting on September 13 to arrest the severe decline of the Turkish lira (TRY) and boost Turkey’s chances of avoiding a pronounced debt and liquidity crisis. The tanking lira drove annual inflation in the country to a 15-year high of 17.9% in August.
Q2’s growth figure represented a slowdown from the expansion of 7.3% y/y in Q1 (revised down in the latest data set by Turkish statistical institute TUIK from 7.4% y/y). The outturn was a touch below the consensus forecast of 5.3% y/y collected by Bloomberg and Capital’s prediction of 6.0% y/y. Last year, Turkey’s credit-fuelled economy expanded at ‘warp speed’, clocking up 7.4%.
“The breakdown of the data showed that domestic demand growth remained strong in Q2. Household consumption growth weakened but that was partially offset by a pick-up in government consumption as the authorities loosened fiscal policy to boost support ahead of the election,” according to Tuvey.
Build-up of imbalances
The period of strong economic growth from mid-2017 was accompanied by a build-up of macroeconomic imbalances. The current account deficit widened to more than 6% of GDP, which made the TRY vulnerable to a sell-off. It is down more than 40% against the dollar since the start of the year.
The latest data suggest that a weaker lira and a sharp tightening of financial conditions started to weigh on growth towards the end of the quarter. “Industrial production growth slowed from 6.5% y/y in May to just 3.2% y/y in June, its weakest performance since late-2016,” Tuvey added.
“More timely evidence suggests that things have got worse at the start of Q3. We expect the Turkish economy to contract by 2-4% y/y in the second half of this year and in early 2019. Overall, we forecast the economy to stagnate in 2019 and our forecasts lie right towards the bottom of the consensus range,” he concluded.
Mercan said Turkish domestic demand has lost momentum compared to the previous quarter, while the contribution of net exports has turned positive as the economy rebalances.
ING had expected Q2 GDP to come in at 5.4%. “The figure shows some moderation from the previous quarter's 7.3% YoY growth (given the fading credit impulse and early signs of moderation in domestic demand),” Mercan said in a note.
Four-quarter trailing GDP growth retreated slightly to 7.8% over the previous quarter, “though growth will likely drop significantly in the second half, as evidenced by the ongoing momentum loss in activity”, he said.
In seasonal and calendar adjusted terms, GDP expanded 0.9% quarter-on-quarter, decelerating from 1.5% q/q a quarter ago, showing that activity has already started to ease and will likely turn negative in the coming quarters.
Private consumption again major driver
Looking at the Q2 breakdown, private consumption was again a major driver with a 6.3% y/y gain, pulling growth up by 3.8 bp. Investment contributed 1.2 bp to the headline, with continuing support from construction, which recorded a 6.6% y/y increase. Machinery and equipment investment, on the other hand, turned out to be barely positive, with a 0.6% y/y rise, not a favourable signal for growth prospects, ING noted.
“It should also be noted that both private consumption and investment have moderated given the fading effects of the credit impulse last year. Government spending, which had been on an uptrend before June's elections, rose by 7.2% YoY, lifting the 2Q growth rate by 1.0 percentage points,” Mercan said.
Exports maintained their uptrend, with a 4.5% increase amid sharp currency weakness and continuing external demand from the EU. Imports moderated to a mere 0.3%, the lowest since 2014 on the back of weaker domestic demand, ING added. “Accordingly, the contribution of net trade turned positive again by 1.0 percentage point. Finally, inventory accumulation deducted 1.7 percentage points to GDP growth,” added Mercan.
Among sectors, services stood out with a 1.8 pp contribution, followed by industry with a 0.9 pp addition to the headline. “A large number of sectors showed some softening over the previous quarter, while agriculture stood out with a negative contribution in 2Q, pulling the quarterly growth down by 0.1 percentage point,” ING also said.
Officials have said that they expect a contraction of the Turkish economy in the third quarter and full-year growth of around 4%, a figure below the 5.5% government target.