The Turkish economy surprised on the down side, expanding at a rate of 1.7% y/y Q3, after growing 2.2% y/y in the previous quarter and 4.8% in Q1. The market had predicted a 3% y/y growth for the third quarter. On a seasonally & calendar adjusted basis, the economy expanded 0.4% q/q in the third quarter after contracting 0.5% q/q in Q2, the statistics office, TUIK, said on December 10. TUIK revised up the Q2 GDP growth to 2.2% from a previous 2.1%. With the Q3 data, the economy has grown 2.8% y/y in the first nine months of the year, causing concerns about the health of the economy.

Domestic demand was weak in the third quarter and GDP growth was driven mainly by exports and government expenditures. Households’ final consumption rose only 0.2% y/y, even weaker than the 0.5% y/y increase recorded in the previous quarter. Private investments were unchanged (0% y/y) in Q3 after contracting 3.6% y/y in the second quarter. Private investments fell 1.6% y/y in January-September. Gross capital formation dropped by 0.4% y/y that came on top of the 3.5% y/y decline in the previous quarter. Gross capital formation fell 1.4% y/y in the first nine months of the year. The pace of the increase in government expenditures quickened to 6.6% y/y in Q3 from 2.6% y/y in Q2, supporting growth. Exports rose 8% y/y after rising 5.7% y/y in Q2 imports dropped 1.8% y/y after falling 4.4% y/y in the previous quarter.

On the production side: The agriculture sector disappointed as the sector’s production contracted 4.9% y/y in Q3 which was sharper than the 2.6% y/y decline in the output in the previous quarter. The output increase in the manufacturing industry eased to 2.2% y/y in Q3 from 2.6% y/y in Q2. The construction sector grew at a rate of 1% y/y in the third quarter, down from the expansion rate of 2.7% y/y in Q2.

The government forecasts a GDP growth of 3.3% for 2014 and an $810bn economy this year while it expects higher growth rates of 4% next year and 5% in 2016. The government may step up pressure on the Central Bank to cut interest rates next year to boost growth before the crucial June 2015 general elections. The country’s large current account deficit is expected to shrink because of the declining oil prices which will also have a positive impact on inflation. But inflation is currently running stubbornly high at 9.15% y/y well above the official target of 5%.