Turkey’s contraction is turning out to be much deeper than anticipated by summer data, which is reinforced by the collapse of locomotive industries for upstream growth and employment. According to polls, up to 80% of the respondents believe the country is mired in a crisis, while the belief that the shocks are a conspiracy by foreign powers is fading fast, exposing the Erdogan administration the fury of the citizens.
Polls a warning to AKP
In 12 polls PA Intelligence reviewed since September, AKP has lost ground in 10, while nationalist MHP ascended strongly. Main opposition party is marginally higher than its 24 June general election results, while central-right IYIP and pro-Kurdish rights party HDP is holding its ground in metropolitan areas and in cities with majority ethnic Kurds. Finally, several polls suggest, voters’ primary motivation in March elections will be to protest poor economic performance. How bad is the contraction and can it get better?
October-December batch of data goes from bad to worse
According to data released on by the Turkish Statistical Institute (TUIK), the Turkish economy grew by only 1.6% in the third quarter, far below the 5.2% registered in the second quarter of the year, or the 7.2% seen from January to March.
The latest numbers are potentially catastrophic for Turkey’s emerging economy, which needs 5%-to-6% growth to maintain the level of job creation required to sustain a healthy economic outlook. At the same time that the economy has contracted, unemployment has skyrocketed to 11.7% of the eligible workforce and, while job creation is losing momentum.
Credit Agency Moody’s is predicting only 1.5% growth for the Turkish economy for the whole of 2018, with an even higher 2% contraction for 2019.
Things could get a lot worse before they get any better
According to data released on December 17, the forecast for the immediate future does not bode well for Turkey with industrial production plummeting by 5.7% in October alone. Those numbers provided further evidence of a continuing downward trend for the Turkish economy, which had already dropped by 2.7% in September.
Investment into Turkey has dropped by a whopping 3.6%, while €16.27 billion has left the country while the capital inflow totalled €11.87 billion in the first quarter.
Renewed pressure is mounting again on the lira once again, fueling inflation amid declining domestic demand. Turkey’s year-on-year GDP measured in euros has dropped by €42.91 billion, with GDP per capita falling to €249, which is actually lower once he four million Syrian immigrants to the population are added into the overall calculations.
Political pressure is mounting
At this point, the only positive number coming out of the Turkish economy is a current account surplus of €1.23 billion in the third quarter, compared to a €13.19 billion deficit in the first quarter. However, for an economy plagued by current account deficits for years, this is an unmistakable indicator of rapidly falling living standards.
Interest rate rises over this past this summer supported the value of the lira after it began to freefall against all major reserve currencies. Compounding the problem was Erdogan’s autocratic style of rule in which he rejected the advice of most economic experts by remaining in favour of lower interest rates to continue driving growth, a policy that he was warned against after inflation hit 16% in July.
Erdogan, who routinely clashed with his central bank governors over monetary policy, continued to prioritise growth and lower rates which prolonged and deepened the currency crisis, which could have been alleviated if he had allowed the central bank to hike interest rates in order to give the economy a chance to rebalance.
Turkey’s currency reserves are notably low compared to its €159.18 billion in short-term debt is denominated in currencies other than the lira. Furthermore, much of the foreign currency in Turkey is held by banks
Key industries turned into wasteland
The current slump has been particularly acute in the construction sector, a major industry for the Turks, which shrank by 5.3% in the third quarter, while durable goods consumption dropped by a shocking 24%. This combination of declining demand and rising prices, known as “slumpinflation”, is a politically toxic phenomenon.
September and October Turkstat data revealed that retail sales plummeted by 12% in volume terms YoY, while in November, except industry all major sectoral classifications such as trade, services and construction registered monthly and annual turnover lower than PPI inflation, attesting to the cash flow squeeze. According to unconfirmed reports, up to 5K companies may be in the process of seeking bankruptcy protection, which has compelled private banks to stop lending.
Additionally, food, cement, ceramics, and electrical equipment show significant deceleration and accompanied by lower inflation, which dropped by 1.4% in November but continues to hover at over 20%, mainly due to the weakness of the lira. According to the details of October industrial production data, export-related industries also registered production declines, probably linked to EU’s slump. After a strong jump in November, BloombergHT’s consumer confidence index treaded water in preliminary December reading.
With the economic indicators looking increasingly grim for the authorities, Erdogan and the AKP may have a tall order on their hands if they want to retain control of Turkey’s economic and political centres – Istanbul and Ankara.