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Economic Confidence Index further slid in April; what now?

Looking forward to the pace of ECI, we might expect a temporary recovery for the May-June period based on the government’s upcoming stimulus measures. Yet, with the realities in Turkey’s economy calling for slower growth, weaker lira and higher rates; the ECI will hardly surpass the 100 threshold in the second half of the year.

Economic Confidence Index further slid in April; what now?

Following its peak of 104.9 in January, Turkey’s Econoic Confidence Index (ECI) slid for the third consecutive month in April by 2 percentage points to 98.3; a first time below the threshold 100 mark since December. ECI consists of consumer confidence, real sector confidence, services sector confidence, retail trade sector confidence and construction sector confidence sub-indices.

The details reflect that the headline figures were pulled down by the real, retail trade and services sector indices while consumer confidence has slightly improved this time around. Yet compared to the January levels an across board deterioration is observed among the sectors.

ECI by definition is a composite index that summarizes consumers’ and producers’ evaluations, expectations and tendencies about general economic situation.  With a temporary gain of value in lira back in January and a mild decline in Turkey’s consumer price inflation, ECI looked rather firm following four months of retreat from the June 2017 peak of 106.4.

Such a spike proved to be temporary as expected, since the deterioration in Turkey’s economic balances turned tangible later on.  That is, with the government’s extensive stimulus to the economy last year overheating carried GDP growth rate to 7.4 percent at the cost of rapidly widening current account deficit pressuring Turkish lira.  The President’s repetitious interventions not to hike the central bank policy rate kept feeding liras devaluation.  As lira engaged to a free fall like depreciation the consumer price inflation failed to ease back to single digits while the core inflation remained solid at around 11 percent.  While the central bank refrained from stepping in with rate hikes, the pressures built on the Turkish economy already pulled up the nominal interest rates in the banking sector as the benchmark Treasury yield moved up to 14.4 percent.  Combined with a heavy external borrowing requirement of 230 billion US dollars this year and the quality of foreign flows deteriorating, Turkish economy began showing signs of slowdown from last year.

As a consequence, the AKP government had to announce very early elections set for June 24 as it looked impossible to keep economic optimism across Turkey up until the normal date of November 2019.  Now with an effort to suppress the economic deterioration amidst rising economic vulnerabilities, the government is about to unveil temporary but rather extensive stimulus measures for a wide range of sectors in the real sector.

Looking forward to the pace of ECI, we might expect a temporary recovery for the May-June period based on the government’s upcoming stimulus measures.  The central bank rate hike of 75 basis points this week earlier serves the purpose of stabilizing lira until the early elections.  The expectations of structural reforms from the government ranks after the elections and further rate hikes might keep the sentiment positive in July as well.  Yet, with the realities in Turkey’s economy calling for slower growth, weaker lira and higher rates; the ECI will hardly surpass the 100 threshold in the second half of the year.

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