Turkey Enters First Recession in a Decade as Elections Loom

(Bloomberg) -- Turkey fell into its first recession in a decade, dealing a blow to President Recep Tayyip Erdogan as the country heads toward bellwether municipal elections this month.

Gross domestic product shrank a seasonally adjusted 2.4 percent last quarter from the previous three months, when it declined a revised 1.6 percent, according to data released on Monday. That matched the median estimate of economists in a Bloomberg survey. From a year earlier, GDP dropped 3 percent.

Driven by Erdogan’s push for growth at all costs and his pressure on the central bank to keep interest rates low, capital poured into Turkey during an era of record monetary stimulus around the world. But an almost uninterrupted expansion that lifted the economy by an average of nearly 7 percent each quarter since late 2009 has fizzled out following a currency crash, policy missteps and an unprecedented diplomatic rift with the U.S.

“This is an indictment of Erdonomics and a direct consequence of a monetary policy in 2018 conducted in the interests of short-term political expediency rather than economic pragmatism,” said Julian Rimmer, a trader at Investec Bank Plc in London.

For investors, the worry is that Turkey will face a long slog to recovery as the torrent of foreign capital dries up while households and companies begin paying down debts. Private consumption plunged by an annual 8.9 percent last quarter, with Turkey’s GDP per capita falling to $9,632 from a little over $10,000 in 2017. In the full year, the economy grew 2.6 percent.

Despite the downturn, Treasury and Finance Minister Berat Albayrak said the silver lining is that the worst is now behind Turkey and the economy is on track for a rapid recovery. Rising exports and tourism income will be the key drivers for growth, he said on Twitter.

The lira declined as much as 0.5 percent after the data release and traded 0.2 percent weaker at 5.4489 per dollar as of 10:32 a.m. in Istanbul. It’s the third-worst performer in emerging markets this year with a loss of about 3 percent against the U.S. currency.

First Test

The undoing of Turkey’s growth model comes at a sensitive time for Erdogan, who first became prime minister in 2003, as he braces for his first test at the ballot box since assuming vastly expanded executive powers last year. After the March 31 vote, Turkey isn’t scheduled to hold another election for four years.

What Bloomberg’s Economists Say

“Turkey was one of the fastest-growing emerging economies in 2017, but its growth wasn’t balanced. Excess government spending and rapid credit growth caused imports to surge and the current account deficit to widen. Unsurprisingly, the economy is paying the price for past excesses.”

--Ziad Daoud, Mideast economist
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In an effort to restart growth, the government has heaped pressure on state banks to ramp up lending, helping annualized credit growth turn positive last month for the first time since August. It recapitalized three of its lenders by selling bonds to Turkey’s unemployment fund, and is working on a fresh plan to further bolster state-owned banks’ capital.

For now, the outlook remains bleak. GDP may be in contraction through the first half of 2019, followed by four quarters of tepid growth that will average less than 3 percent from a year earlier, according to Bloomberg polls published before Monday’s data.

As the central bank holds rates high to stabilize the lira and keep inflation in check, the engine of Turkey’s economy is misfiring. Real banking credit shrank by 7.2 percent on a quarterly basis in the last three months of 2018.

“Unlike Turkey’s past V-shaped recoveries, there’s the significant risk that the recovery will be much slower this time round,” said Inan Demir, an economist at Nomura International Plc in London. “The entire Turkish economy may be facing deleveraging pressures.”

--With assistance from Harumi Ichikura, Sarina Yoo and Constantine Courcoulas.

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, ;Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky, Alaa Shahine

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