How are security concerns and political chaos affecting Turkey's economy?

The consequences of July’s coup attempt, numerous terrorist attacks, a weak currency and heightened political uncertainty took a toll on the Turkish economy in the third quarter of 2016. Revised data show that GDP contracted for the first time in seven years, disappointing the markets and contrasting the previous quarter’s expansion. On balance, FocusEconomics panelists expect that the economy will expand 2.7% in 2017, which is down 0.3 percentage points from last month’s estimate. 

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Turkey’s economy contracted for the first time in over seven years in the third quarter of 2016, reflecting the implications of July’s failed coup, the weakening lira and escalating political unrest. GDP contracted 1.8% from the same quarter of the previous year, contrasting the 4.5% increase seen in the second quarter. The print came in well below the 0.5% drop expected by the markets and was driven by a deterioration in private consumption and external demand. In December, the Turkish Statistical Institute (TurkStat) changed the methodology it uses to compute national accounts. Revised numbers show that the Turkish economy expanded 6.1% in 2015, up from the 4.0% expansion previously estimated. The growth rates for the first two quarters of 2016 were also revised substantially.

Private consumption dropped 3.2% in the third quarter, which contrasted the 3.7% increase seen in the second quarter and marked the lowest reading since Q1 2009. Even the impressive 23.8% increase in government consumption in Q3 (Q2: +13.7% year-on-year) was not enough to prevent the economy from contracting. On the external side of the economy, exports dropped 9.2% on an annual basis, deteriorating from the second quarter’s 2.1% drop. Moreover, growth in imports slowed from 7.2% in Q2 to 2.4% in Q3. As a result, the external sector’s net contribution to overall growth deteriorated from minus 2.6 percentage points in the second quarter to minus 2.9 percentage points in the third quarter, the lowest reading in nearly two years.

The GDP data release put pressure on the lira. The currency continued to depreciate against both the U.S. dollar and the Euro thereafter and hit a new low on 9 January following the latest terrorist attack in Istanbul and rising inflationary pressures. The deteriorating economic environment poses a challenge to the troubled government. A draft bill designed to give President Recep Tayyip Erdogan an executive presidency was approved in late December by a parliamentary commission. The changes will be debated this month in parliament and will possibly go to a referendum before passing into law. Erdogan’s campaign to change the constitution through a referendum broadly depends on the performance of the Turkish economy. Business and consumer confidence indices have plummeted since July’s coup attempt and tourism—a key source of growth—has been hit by the numerous terrorist attacks in the past months.

The Turkish government expects the economy to expand 4.4% in 2017. FocusEconomics Consensus Forecast panelists are less optimistic and see GDP expanding 2.7% this year, which is down 0.3 percentage points from last month’s forecast. For 2018, the panel sees the economy growing 3.1%. 

Date: January 16, 2017