Turkey: Economic growth cools in the third quarter
November 30, 2021
Economic growth cooled to 7.4% year-on-year in the third quarter from the second quarter’s stellar 22.0% expansion. However, the economy grew 2.7% on a seasonally-adjusted quarter-on-quarter basis in the quarter, up from the prior period’s 1.5% expansion.
Domestically, the annual reading reflected more moderate, albeit still robust, household consumption and a contraction in capital expenditure. Private spending grew 9.1% year-on-year, down from the 23.3% expansion logged in the second quarter. Intensifying price pressures will have weighed on spending, although a lower unemployment rate in the quarter (Q3: 11.7%; Q2: 11.9%) likely limited the slowdown. Fixed investment, meanwhile, swung from a 20.5% expansion in the second quarter to a 2.4% contraction in Q3. More positively, public consumption growth accelerated to 9.6% year-on-year in the quarter, from the second quarter’s 3.4% increase.
On the external front, exports of goods and services grew 25.6% in annual terms in the third quarter. This was down from the second quarter’s 61.1% increase, and came amid a less supportive base effect. Meanwhile, imports of goods and services dived 8.3% in the quarter, swinging from the second quarter’s 20.4% expansion and highlighting softer domestic demand. All told, the external sector contributed 6.8 percentage points to GDP in the quarter, slightly down from the second quarter’s 6.9 percentage-point contribution.
Looking at the fourth quarter, the economy will likely feel the pinch from continued inflationary pressures, as the currency nosedives amid continued monetary policy easing and political interference. Next year, economic growth is forecast to cool notably compared to this year. However, normalizing economic conditions should support domestic and external demand, while still-robust business confidence and high capacity utilization rates should buoy investment growth. The balance of risks is skewed to the downside amid elevated inflation and currency weakness: The private sector’s debt overhang is largely denominated in euros and U.S. dollars, while renewed currency volatility has begun to weigh on consumer sentiment.
Analysts at Fitch Solutions added:
“We remain cautious of the outlook […] and retain our view that the Turkish economy will slow sharply in 2022 with a growth forecast of 4.0%. Our forecast is driven by three main considerations: Firstly, the Turkish economy is showing signs of overheating with inflation rising at the strongest pace recorded in three years. Secondly, we believe that external conditions could shift rapidly amid the discovery of a new variant of concern of the Covid-19 virus (Omicron) and tighter monetary conditions in developed markets. Finally, continued supply chain disruptions and high energy prices in continental Europe could cause disruptions to Turkey’s domestic manufacturing that could even translate to eventual factory closures if the macroeconomic situation worsens and credit lines start to dry up.”
Author: Jan Lammersen, Economist