Turkey: Economy contracts in Q1 on collapsing domestic demand
As widely expected, national accounts data showed that the economy continued to shrink in the first quarter of the year, contracting 2.6% year-on-year (Q4: -3.0% year-on-year); however, the contraction was less severe than market analysts had expected, as a surge in pre-election government expenditure cushioned the fall somewhat. Moreover, in quarter-on-quarter seasonally-adjusted terms the economy expanded 1.3% (Q4: -2.4% quarter-on-quarter), following three consecutive contractions, thereby exiting the recession.
Domestic demand continued to crumble year-on-year in the quarter. Household expenditure dropped 4.7% over the same quarter a year prior; although this marked an improvement from the fourth quarter’s 8.9% decrease, it was still the second-largest contraction in nearly a decade. Consumers continued to feel the pinch from a tumbling lira, which lost nearly half its value compared to the first quarter of last year, and a consequent rise in inflation amid increasing unemployment and still-depressed consumer sentiment. Fixed investment also fell at the sharpest rate in almost a decade, contracting 13.0% year-on-year, down slightly from the prior quarter’s 12.9% drop. On the other hand, public consumption surged in the quarter, growing by 7.2% over the same period a year prior (Q4: +3.6% yoy) as the government ramped up spending ahead of the 31 March local elections.
Collapsing domestic demand owing to a significantly weaker lira also affected the external sector’s performance, which cushioned the contraction somewhat. Exports of goods and services rose 9.5% year-on-year in the quarter, which was down from the 10.6% expansion in the prior quarter; however , imports of goods and services dropped at an accelerated pace of 28.8% year-on-year (Q4: -24.4% yoy), marking the strongest decrease in a decade as foreign goods and services became noticeably more expensive.
Looking ahead, however, the economy is expected to remain in a tough spot, although a rebound is expected towards the end of the year. The weak lira, which is seen losing yet more ground against the greenback and the euro this year, still-high inflation and rising unemployment will continue to depress domestic demand. On the other hand, government consumption is likely to have grown at a steady pace in the second quarter against the backdrop of a re-run of the Istanbul mayoral election, which President Erdogan’s AK party lost first time around. The annulment of the Istanbul election results, which was seen as another attack on the country’s democratic institutions, will keep markets jittery.