Turkey: Economy contracts sharply in Q4 2018
March 11, 2019
According to data released by Turkstat on 11 March, the Turkish economy shrank 3.0% in the fourth quarter of last year, with the aftereffects of the currency crisis cooling activity. Q4’s reading came after a revised 1.8% expansion in Q3 (previously reported: +1.6% yoy), which meant growth for 2018 as a whole came in at 2.6%, the weakest reading since the height of the global financial crisis in 2009.
Domestic demand collapsed in the fourth quarter. Private consumption and fixed investment dropped 8.9% and 12.9% respectively (Q3: +0.8% and -4.7% respectively) amid depressed sentiment, high inflation and tight financial conditions. Moreover, public consumption growth weakened (Q4: +0.5% yoy; Q3: +3.4% yoy), likely the consequence of the government tightening its fiscal belt in efforts to convince markets of its commitment to fiscal prudence.
In contrast, the external sector strengthened in Q4, due to lackluster domestic demand and the weak lira supporting export competitiveness. Exports of goods and services increased 10.6% (Q3: +13.6% yoy), while imports contracted 24.4% (Q3: -16.8% yoy). As a result, the external sector contributed 8.4 percentage points to growth, up from Q3’s contribution of 6.7 percentage points.
Looking ahead, the economy is likely to contract in H1, as still-elevated price pressures, tight financial conditions and weak sentiment depress domestic activity. However, the external sector should continue to provide support and the economy ought to recover somewhat in the second half of the year as interest rates fall and sentiment rebounds. Moreover, as Muhammet Mercan, chief Turkey economist at ING, states: “In recent months, the government has announced a number of stimulus measures for both households and companies which can be helpful for economic recovery.”
Author: Oliver Reynolds, Economist