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Bottoming out in the Turkish economy? Well not that easy!

16 April 2019

February industrial production and turnover indices details showed some positive developments for those who are hoping for a swift recovery.

In fact, Treasury and Finance Minister Albayrak just commented from his US roadshow that there were signs as of 1Q19 about Turkey escaping from a “technical recession.”

So what is a technical recession exactly? It is largely accepted wisdom that a “technical recession” is when you have two quarters in a row of economic contraction measured by an economy’s growth indicator- that is the Gross Domestic Product (GDP) which is the market value of all the final goods and services a country makes in a year.

According to many economists, there are some generally accepted predictors that define a recession; and  when they appear together, recession occurs. First, asset prices are on a declining trend; like the home prices and other financial assets like the bonds as both is happening in Turkey.  Another predictor of recession is unemployment; which we saw reaching to almost 15% as of January 2019.  In addition, Turkey’s positively sloped curve signals only inflationary growth.

Among some indicators, unemployment rate and GDP can be categorised under “lagging indicators.” The  “leading indicators” include PMI, industrial production, the yield curve, sentiment and confidence indices, wholesale-retail trade, etc.

As of this morning we have the February industrial production details at hand. As per the figures, Turkey’s industrial production extended its decline to six months with a 5.1% y/y decline in February in calendar adjusted terms. This is an improvement when compared with the January 2019 contraction of  7.4% y/y.

Weakness in industrial production again stemmed from intermediate goods production, which posted 9.7% y/y decline while capital goods production was also down by 7.8% y/y, according to calendar adjusted numbers. Durable goods and energy were the only categories that posted growth, the former thanks to SCT cuts in white goods and furniture that began in November. Production growth in durable goods was up 5.0% y/y in February while energy production was up by 4.5% y/y.

What Minister Albayrak might be referring to as a signal for the end of technical recession during 1Q19 could be the industrial production posting growth for the second time in a row February: seasonally adjusted growth was 1.3% m/m on top of previous month’s 1.0%.

Yet, there is more than one reason to be suspicious about Albayrak’s everlasting optimism.  In addition to 7.8% y/y contraction in capital goods, machinery and equipment production, which posted 17.1% y/y drop hints that there is no revival in investment sentiment. Thus, March industrial production is set to contract extending the recessionary environment; though at a decelerated pace.

As for the credit growth staged in March, it came with the push from the government ahead of the local polls through the state banks mostly while some private banks were also “motivated” to act alongside.  Thus, the staged double-digit credit growth does not really match with the weak recovery for it should have had created a very tangible recovery; and not a weak one that we have been seeing from the industrial production.  In fact, Turkey Manufacturing PMI rose only to 47.2 in March 2019 from 46.4 in February which still points to the 12th month of contraction in manufacturing activity.

It is not only the domestic demand that remains weak that blocks Turkey’s manufacturing from growing but the softening external demand amidst the weakness in the eurozone also stands as a counter factor as well.  Turkey’s exports contracted by 0.3% y/y in march and could only post 3.34% surge during the 1Q19; a figure making “export based GDP growth” unrealistic.

The continuation of delevareging in the corporate sector also signals that an end of to the ongoing recession is nowhere near soon. As evident from the February release from the central bank, among the private sector’s outstanding loans received from abroad, long-term loans were USD 209.5 billion as of February, decreasing by USD 763 million whereas short-term loans (excluding trade credits) were USD 13.1 billion, with a drop of USD 2.3 billion compared to the end of 2018.

As for the calendar adjusted retail sales volume with constant prices in February 2019 it declined by 4.9%  compared with the same month of previous year.  While the drop in the food sales was limited to 1%, on a more drastic note as the non-food sales sank by 8.2%, the automotive fuel sales decreased by 1.7%.

In the meantime, Turkey’s CPI inflation is high at 20%; two year bond yields float around 21.5% levels; the citizens have record high FX deposit holdings around USD 182 billion accounting to 55% of the total deposits; Turkish lira deposit rates have been rising again along with loan rates and the lira/dollar has been losing ground to 5.82 (as of 15:30 Turkey time).  The most recent consolidated budget (March 2019) release shows how the government was engaged to a spending extravaganza to win votes ahead of the March 31 local polls. It of course hints that unless reined in sharply in the remainder of the year Turkey’s solely remaining economic anchor is lost down the drain as the end of year budget deficit to GDP ratio is set to rise to 3.5% which is 1.8 percentage points above the AKP promised level.

As Minister Albayrak had to face during his Washington visit, majority of the foreign investors he contacted have found Turkey’s “reform” program launched last week, empty in content.  Inflation, fiscal performance and the “reform” program falling short of being an anchor to Turkey’s ailing economy, Turkey will hardly get over the current recessionary environment; independent from the Minister calling it a “technical” one to make things appear less stingy.



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