Turkey: Economic growth dims in the second quarter, further slowdown likely in H2
According to data released by Turkstat on 10 September, the Turkish economy lost steam in the second quarter. This was widely anticipated by market analysts as the impact of the huge government credit stimulus began to fade. Economic growth clocked 5.2% in Q2, down from Q1’s revised 7.3% (previously reported: +7.4% year-on-year). Although Q2’s growth figure was likely the fastest in South-Eastern Europe, it is unlikely to be repeated in Q3, with the economy set to hit the brakes in the second half of the year as the impact of the lira collapse bites.
Looking at a breakdown by expenditure, more sluggish private consumption and fixed investment growth underpinned the weaker GDP reading. Private consumption expanded 6.3% (Q1: +9.3% yoy), likely dampened by higher price pressures, while fixed investment growth slipped to 3.9% (Q1: +7.9% yoy) due to a sharp slowdown in machinery and equipment investment. In contrast, government consumption growth picked up on pre-election spending (Q2: +7.2% yoy; Q1: +4.9% yoy).
The external sector strengthened notably in the second quarter. Exports of goods and services increased 4.5% (Q1: +0.7% yoy) on the weaker currency and solid EU demand, while imports rose a mere 0.3% (Q1: +15.4% yoy) due to softer domestic demand. As a result, the external sector contributed 0.9 percentage points to growth in Q2, contrasting markedly the 3.5 percentage-point subtraction in Q1.
Looking ahead, economic growth is set to tail off considerably over the next few quarters as the huge lira depreciation raises firms’ debt burdens, increases input costs and generates economic uncertainty. Elevated inflation will also likely dig into consumers’ purchasing power. In addition, tighter monetary and fiscal policy in response to the currency crash will depress domestic demand. In contrast, the external sector should receive a boost from increased price competitiveness.