Turkey’s Post-Recession Bounce Unlikely to Meet Erdogan's Target
Turkey Politics Take a Toll on Growth as Economy Loses Momentum
(Bloomberg) --
Turkey’s economy fared better than forecast in the second quarter but growth will likely fall far short of the government’s expectations for the full year.
Gross domestic product expanded a seasonally adjusted 1.2% from the previous three months, according to data released on Monday, down from a revised 1.6% in the first quarter and better than the median estimate of 0.4% in a Bloomberg survey. From a year earlier, GDP shrank 1.5%.
While the risk of a double-dip recession is receding, the government’s 2.3% target for 2019 may be out of reach. Still, Treasury and Finance Minister Berat Albayrak has said that he expects Turkey to post positive growth for the year. The focus is now shifting to monetary easing following a record cut in interest rates by the central bank in July.
“Given the lag in the monetary transmission mechanism and a lack of robust external flows, full-year growth still looks set to undershoot the government’s estimate by some margin,” said Kubilay Ozturk, an economist at Deutsche Bank AG. Still, the second-quarter performance “looks set to defy expectations for a deep full-year recession expectations for the Turkish economy.”
The lira extended gains after the data before paring its advance. It was trading 0.3% stronger against the dollar as of 1:06 p.m. in Istanbul.
Investment, Consumption
The slowdown in quarterly growth was driven by a slump in fixed-capital investments, which shrank 7.4% from the previous three months, according to a breakdown of GDP data by Turkstat. Consumer spending, which dropped 1.1%, also contributed to the annual contraction.
Government spending, usually a big driver of GDP growth, rose 3.3% from year earlier while exports rose 8.1%. The median estimate in a Bloomberg survey of economists sees the economy shrinking 1.5% in 2019, the first annual contraction since 2009.
“The deepening decline in fixed investments is a worry, particularly given negative repercussions for the supply side of the economy in the coming years,” Ozturk said.
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“Low but positive growth -- that’s the state of the Turkish economy. We expect this condition to continue this year despite the government’s efforts to rev up growth with yet another credit boom.” --Ziad Daoud, Mideast economist Click here to view the piece. |
Turkey exited its first recession in a decade in the first quarter, but the economy has struggled to keep up momentum as the prospect of punitive U.S. sanctions dented consumer and business confidence. President Recep Tayyip Erdogan’s ruling AK Party refusing to concede defeat in the race for Istanbul mayor in March compounded the negative sentiment.
Foreign investors who balked at the risks pulled their money out and households started hoarding dollars. Meanwhile, the lira suffered the biggest drop in emerging markets in the second quarter, giving way to an outsized draw-down of the central bank’s limited reserves.
The lira has since stabilized and policy makers have started easing access to liquidity -- central bank Governor Murat Uysal slashed the benchmark rate by 425 basis points in July, undoing some of the monetary tightening designed to backstop the currency.
But continued growth now hinges on banks’ ability to extend credit.
On an annualized basis and adjusted for foreign-currency fluctuations, credit expansion is hovering below 5% after briefly touching 20% in April. This comes despite a more than 10 percentage point drop in lira loan rates and government measures designed to prop up lending. Meanwhile, consumer confidence is hovering near a five-year low, and leading indicators such as industrial production point to further pain.
Turkey may end this year with zero growth, although the latest data suggest that a slightly stronger pickup is also possible, according to Erkin Isik, senior economist at QNB Finansbank.
“The latest policy decisions to support loan growth and the accommodative global liquidity conditions are helpful,” Isik said.
--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, ;Lin Noueihed at lnoueihed@bloomberg.net, Constantine Courcoulas, Paul Abelsky
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