Turkey Economy Shrinks Unexpectedly in Coup Attempt Fallout

(Bloomberg) -- Turkey’s economy unexpectedly shrank in the third quarter, led by a slump in consumption, in the most significant sign yet that July’s failed coup and the political turmoil it provoked are weighing on confidence.

It’s the first time in seven years that Turkey has announced a contraction. The lira weakened.

Gross domestic product shrank an annual 1.8 percent in the three months starting in July, Turkey’s statistics bureau reported Monday. The median estimate in a Bloomberg survey forecast an annual expansion of 0.3 percent.

“The slowdown is driven by consumption,” said Bora Tamer Yilmaz, an Istanbul-based economist at Ziraat Bank. Recent home and car sales point to a pickup in consumer spending in the fourth quarter, and “we might see a rebound in exports due to a weaker currency,” Yilmaz said.

Consumer and business confidence have fallen since the July 15 coup attempt, which ushered in a period of falling investments and political instability as the government went after perceived enemies. The crackdown has cost tens of thousands of people their jobs and drawn criticism from Western governments, even as the takeover bid gave President Recep Tayyip Erdogan more ammunition in his quest to formally widen his authorities.

Government Spending

Consumer spending took the biggest hit from the takeover bid in the third quarter, dropping 3.2 percent from a year earlier. Government outlays on wages, goods and services rose 23.8 percent, limiting the impact from a decline in investments, which fell 0.6 percent from the same period in 2015.

The failed coup, terrorist attacks and bad weather all contributed to the economy’s worse-than-expected performance, Deputy Prime Minister Mehmet Simsek said in an e-mailed statement. “Geopolitical tensions, weak global trade and the drop in capital flows to emerging economies weighed on growth in the third quarter,” he said.

Turkey’s strong public finances and well-capitalized banks will keep the economy resilient to shocks, he added.

The slowdown in activity stretched across broad segments of the economy. Agricultural output shrank 7.7 percent, industrial production fell 1.4 percent and services contracted 8.4 percent, according to the report.

The statistics bureau said last week that it changed the way it calculates GDP to make it consistent with accounting changes in the rest of the world and better measure the pace of economic activity. As a result, the base year it uses to calculate GDP was changed from 1998 to 2009. The new method amplified the annual contraction in the economy in the third quarter and makes it more difficult to compare with past performance, according to Yilmaz.

New Method

“Under the new method, growth in previous quarters is now estimated to be higher than previously thought, which might make it possible to achieve the government’s growth target of 3.2 percent this year,” Yilmaz said.

Growth in the first and second quarters of this year was revised to 4.5 percent, from 4.7 percent and 3.1 percent, respectively. GDP expansion in 2015 was revised to 6.1 percent from 4 percent. Turkstat says it now makes an “independent” annual GDP expansion estimate, unlike in the past, when it used to take an average of four quarter changes in the economy.

The lira fell after the report and was trading 1.5 percent lower at 3.5314 per dollar at 12:12 p.m. in Istanbul.

Turkstat didn’t release comparative growth figures for the previous three-month period because officials couldn’t produce seasonally adjusted data on time, the agency’s acting head, Mehmet Aktas, said at a press conference in Ankara. The agency plans to release that data when it publishes the fourth-quarter GDP report on March 31, he said.

--With assistance from Selcan Hacaoglu To contact the reporter on this story: Onur Ant in Ankara at oant@bloomberg.net. To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Amy Teibel, Stuart Biggs