Turkey Risks Double-Dip Recession After First-Quarter Bounce

(Bloomberg) -- Turkey’s first-quarter recovery will likely be short-lived after a slump in the lira, economists predicted.

Industrial production rose a seasonally adjusted 2.1% in March from February, making for three straight months of gains as authorities ramped up fiscal stimulus, according to data released by Turkstat on Tuesday.

Helped by growth in mining and quarrying, output only declined an annual 2.2%, faring better than every estimate compiled by Bloomberg. The median of eight forecasts in the poll was for a drop of 4.4%.

The upswing risks being wiped out as accelerated declines in the lira cripple domestic demand and put a strain on Turkish companies saddled with a $315 billion foreign-exchange debt pile. While the technical recession probably ended in the first quarter, “we cannot rule out a double-dip,” said Inan Demir, an economist at Nomura International Plc in London.

“The financial market volatility since late March and ongoing political uncertainties will weigh on economic activity in the second quarter,” Demir said.

What Bloomberg’s Economists Say:

“The industrial production data are the latest evidence that the economy exited a recession in the first quarter. But given the recent wobble in the lira, there’s a real risk the economy could dip back into recession later this year”

-- Ziad Daoud, Mideast economist
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While Turkey ended last year with two consecutive quarters of contraction following a currency crash, Treasury and Finance Minister Berat Albayrak has already indicated in April that the Middle East’s largest economy may be on course to recovery.

Turkey is now preparing for a rerun of a municipal vote in Istanbul after President Recep Tayyip Erdogan’s ruling AK Party lost the March election by a narrow margin, threatening to usher in a fresh period of political turmoil. The question is if the economy can weather another bout of lira weakness. The currency is the worst performer in emerging markets this quarter with a loss of over 8% against the dollar.

Albayrak has stuck with his self-imposed growth target of 2.3% for 2019, which remains sharply at odds with forecasts for a continued contraction by most economists. Goldman Sachs Group Inc. and Morgan Stanley just revised down their projections for this year and now envisage a decline in gross domestic product of 2.5% and 1.8%, respectively.

“The industrial production data confirm some stabilization, as lending has recovered with support from state banks and the introduction of a number of stimulus measures,” said Muhammet Mercan, chief economist at ING Bank AS. “However, whether this performance can be maintained is unclear as lending activity has been losing momentum again in the second quarter while downside risks to the economic recovery will remain.”

--With assistance from Harumi Ichikura.

To contact the reporter on this story: Cagan Koc in Istanbul at ckoc2@bloomberg.net

To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, Paul Abelsky, Constantine Courcoulas

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