Turkey's Fast-Paced GDP Growth Shows Signs of Slowdown Ahead

(Bloomberg) -- After one of the best growth performances among peers in the second quarter, Turkey’s economy is showing signs of a slowdown that some investors say will morph into a technical recession later in the year.

Gross domestic output rose 5.2 percent during the three months through June from a year earlier, in line with the median estimate of 5.3 percent in a Bloomberg survey. While that keeps Turkey’s place among the world’s fastest-growing nations, a deeper dive into the data shows consumers and investors starting to hit the brakes, while government spending and exporters prevented a more rapid slowdown.

The lira’s recent depreciation, though it benefits exporters, will force the government to reduce spending and the central bank to raise borrowing costs to stabilize financial markets, said Inan Demir, an economist at Nomura International in London who had the most accurate prediction in the Bloomberg survey.

“This is just a prelude to a deeper slowdown that will take hold in the second half,” Demir said. “I expect two consecutive quarters of contraction in the economy: a technical recession.”

The lira reaction to the news was muted; it was trading 0.4 percent lower at 6.4372 per dollar at 12:15 p.m. in Istanbul, bringing the year’s losses to around 41 percent.

The latest run on the lira began with the eruption of a row between Ankara and the U.S. over an American pastor held in Turkey for almost two years on espionage and terrorism-related charges. Turkish policy makers led by President Recep Tayyip Erdogan have accused the U.S. of waging an economic war and using the currency as its main tool of attack.

The currency rout came with a price on Turkey’s real economy, leading to a spike in the cost of borrowing for corporates and consumers alike, and a drop in confidence. Deterioration in the economic outlook has resulted in downward revisions to growth estimates by banks and credit rating agency Fitch.

The slowdown in consumer demand will be more pronounced in the third quarter but with exports and tourism revenues rising, “economic balancing” seems to have started, Treasury and Finance Minister Berat Albayrak said in a statement after the data. Recent market volatility underlined that high inflation and foreign trade imbalances have to be tackled, he said.

Monday’s report shows a slowdown in some sectors may have begun even before the market turmoil really kicked in. Below are the highlights from Turkstat’s GDP report:

  • Private consumption, which is estimated to make up nearly two-thirds of the economy, grew 6.3 percent on an annual basis during the first three months of the year, slowing from a revised 9.3 percent in the first quarter
  • Government spending on consumption rose 7.2 percent from a revised 4.9 percent in the previous quarter
  • Spending on investments rose 3.9 percent from a revised 7.9 percent with construction expanding 6.6 percent and spending on machinery and other equipment inching up 0.6 percent
  • Exports rose 4.5 percent from revised 0.7 percent while imports increased 0.3 percent
  • Agriculture contracted 1.5 percent, compared with a 6.1 percent expansion; industries rose 4.3 percent, down from 8.1 percent
  • Expansion in services was led by banks and insurance companies whose economic output rose 12.1 percent, up from 3 percent

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