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Recession it is!

Turkey officially entered recession at the end of last year, with its second quarter GDP officially announced at -3% growth year-on-year.…

Recession it is!

Turkey officially entered recession at the end of last year, with its second quarter GDP officially announced at -3% growth year-on-year.  Seasonally and calendar adjusted GDP decreased by 2.4% on a quarterly basis following 1.5% contraction in the third quarter of 2018. Thus, Monday’s fourth quarter data means that Turkey officially entered a recession, defined as two consecutive quarters of negative growth.

Last year’s collapse in the lira and a sharp hike in interest rates up to 24% by the central bank brought economic growth to a halt. Maroeconomic imbalances which have stemmed from a severe spike on the current account deficit to GDP ratio that had reached 6.3% as of May 2018 and the loss of control on the inflation front along with the tension in Turkey-US relations have led to a full blown currency crisis.  The following spillover effects on the economy manifested as a plunge in lending by the banks and a sharp fall in business confidence and consumer spending.

The figures showed that Turkey’s full-year GDP growth was 2.6% in 2018 that is in sharp contrast with the 2017 performance of 7.4% GDP growth which had owed to the AKP government’s stimulus measures to spur domestic demand.

Details show that apart from the contribution of net exports and public spending, an across the board decline in the sub-sectors have made the economic contraction rooted.  In figures, the public spending up by 0.5%, was more than wiped off by the 8.9% contraction in domestic demand and 12.9% drop in the investments. The manufacturing sector alone was down by 7.4% along with the AKP’s government’s favourite tool to stimulate demand- that is the construction sector that has posted -8.7% yoy growth.

Berat Albayrak, the Turkish finance minister, acknowledged the slowdown in growth following Monday’s data but blamed it on a “speculative attack” by unnamed outsiders, and said that the worst of the country’s economic problems were now behind it.  Despite the disappointing data, Albayrak said the worst growth expectations had not materialised and argued that the worst was over for the Turkish economy.

Yet, the nature of Turkey’s current economic contraction and the flow of macroeconomic data in the first two months of 2019 suggest the otherwise.  That is, while the rising non-performing loans will limit the ability of Turkish banks to support growth, the real sector’s heavy external debt payments keep new investments subdued.  Moreover, the still very high rate of interest and weak lira after last year’s 30% plunge keep consumers at bay.

Thus, with a forward looking perspective it would be safe to say that Turkey’s economic recession will last at least until the end of first half of 2019; with signs of positive growth due later in the summer months. A possible fourth quarter GDP on the positive territory would not be enough to keep Turkey’s 2019 GDP growth intact; thus -2% GDP growth for the whole of 2019 appears in the cards.

Among Monday’s data release was the January 2019 balance of payments that showed a 813 million current account deficit carrying the 12 month level down to USD21.6bn from the end of 2018 level of USD27bn. The continuing contraction in the current account deficit is of course a reflection of the severity of GDP contraction lasting in 1Q19.  In fact, the monthly currency account balance is a surplus of USD2.9bn when excluding gold and energy trades.  On the financing side, while the banks and the real sector continue with external debt payments, the government’s external financing of USD3.4bn has saved the day.  Thus, the net errors and omissions stand at a negative of USD1.8bn which will soon turn to positive again after the local elections due on March 31.

For the time being, the delays to rate hikes by the US Federal Reserve and the European Central Bank have kept fund flows positive to emerging markets.  Yet, Turkey remains vulnerable to a possible change in the sentiments with its heavy reliance on external funds to keep growth.  Furthermore, the row between Turkey and the US over the S400 missile system purchase from Russia is complicating the situation.

Thus, the economic situation is expected to have an impact on the outcome of the March 31 local elections, as the AKP government lead by President Erdogan is playing tougher each day to keep the   control of Istanbul and Ankara.


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