False Dawn Looms Over Turkey After Likely End of Recession

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A long slog awaits Turkey even if its first recession in a decade ended last quarter.

A flurry of stimulus kicked in before March elections as lending by state banks powered gains in industrial production and retail sales. An economic turnaround in Europe, the main destination for Turkish exports, also offered a bright spot.

But accelerated declines in the lira spell trouble for an economy where consumer spending accounts for an estimated two-thirds of output, threatening to cripple demand and put a strain on Turkish companies saddled with a $315 billion foreign-currency debt pile. Besides, it’s a risk for inflation, still stuck around 20% and preventing the central bank from cutting interest rates. A controversial rerun of Istanbul elections next month is also keeping the market on edge.

“The problem is there hasn’t been a normalization of economic policy, and the uncertainty regarding the election is delaying any form of long-term recovery,” said Guillaume Tresca, a strategist at Credit Agricole SA in Paris.

Still, the state-driven credit push probably paid off, at least in the short term. Data due Friday will show the Middle East’s largest economy expanded a seasonally adjusted 1.3% in the first three months of the year after two consecutive quarters of contraction, according to the median of 10 forecasts. Gross domestic product shrank 2.8% last quarter from a year earlier, another Bloomberg survey of economists showed.

Here’s the lowdown on Turkey’s economy:

• Credit grew for the first time since August’s market rout. Lending by state banks soared 30% to 1.09 trillion liras ($184 billion) last quarter, while loans extended by private banks rose 5%
• Industrial production climbed a seasonally adjusted 2.1% in March from February, making for three straight months of gains
• Consumer confidence dropped in May to the lowest level since record-keeping began in 2004
• The lira has lost about 6% against the dollar so far this quarter, the worst performer in emerging markets

What Bloomberg’s Economists Say

“The economy might have stopped shrinking, but there’s a risk it could dip back into recession.”

--Ziad Daoud, Mideast economist
Click here to view the piece.

Despite the possibility of a double-dip recession, the Turkish government is sticking with its growth target of 2.3% for 2019. That remains sharply at odds with forecasts for a continued contraction by most economists. Goldman Sachs Group Inc. and Morgan Stanley revised down their projections for this year and now envisage a GDP decline of 2.5% and 1.8%, respectively.

Turkey’s menu of risks ahead also includes tensions with the U.S. President Recep Tayyip Erdogan has rebuffed American demands that Turkey delay the purchase of a Russian S-400 missile system as the days tick down to its possible delivery this summer. Pushing ahead with the deal carries the threat of U.S. sanctions that could plunge Turkey into renewed economic turmoil.

“For now we can focus only on the very short term, given the immense political risks around the S-400 purchase that might lead to substantial market volatility,” said Inan Demir, an economist at Nomura International Plc in London. “Early indicators for the second quarter point to another quarter of sequential contraction, while the outlook for the second half of the year will be dictated by geopolitical risks.”

--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, Amy Teibel

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