Turkey's Road to Recovery Looks Long Even as Recession Ends

(Bloomberg) -- Turkey exited recession in the first quarter on the back of increased lending by state banks, a temporary boost that’s since been overshadowed by the lira’s slump.

Gross-domestic product expanded 1.3% from the previous three months when adjusted for seasonal impact, marking a recovery from the end of last year and matching economists’ estimates.

But activity still remains subdued compared with last year with GDP falling 2.6% from the same three-month period in 2018, driven by a slump in household spending on consumption, which is traditionally the main driver of growth. A continued recovery hinges on the prospects for the lira, whose 5% decline this quarter brought consumer confidence to an all time low. The struggling currency is 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.

“Very simply activity was boosted by looser fiscal policy and state bank-led credit expansion,” Inan Demir, an economist at Nomura International Plc in London, said after the data. “Second-quarter indicators are suggesting that lira weakness is undermining confidence -- both consumer and business -- which is one of the traditional channels that affect growth.”

GDP Highlights

Below are highlights of Friday’s GDP report:

• The rebound in quarterly activity was broad-based with financial activities, manufacturing and agriculture sectors returning to positive growth from the preceding three-month period.
• Government spending on purchases of goods and services rose 7.2% from the same quarter a year earlier, blunting the impact from household spending which fell 4.7% during the same period and investments, which slumped 13%.
• Exports rose 9.5%, as lira’s declines allowed Turkish industrialists to remain competitive in overseas markets.

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.

Credit grew for the first time since August’s market rout. Lending by state banks soared 30% to 1.09 trillion liras ($181 billion) last quarter, while loans extended by private banks rose 5%.

Still, early signs suggest the recovery may be losing traction. Consumer confidence dropped in May to the lowest level since record-keeping began in 2004.

Despite the possibility of a double-dip recession, the Turkish government is sticking with its growth target of 2.3% for 2019. By contrast, Goldman Sachs Group Inc. and Morgan Stanley have revised down their projections for this year and now envisage a GDP decline of 2.5% and 1.8%, respectively.

Tensions with the U.S. rank high among the risks ahead for Turkey. 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.

“The first-quarter upturn was only really driven by fiscal pump priming” and credit growth before the municipal elections, said Timothy Ash, a strategist at Blue Bay Asset Management in London. “Confidence indicators suggest that in the second quarter, the economy double dipped, as consumers seem worried by the political backdrop.”

--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, ;Selcan Hacaoglu at shacaoglu@bloomberg.net, Mark Williams

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