Turkey: Economy expands at weakest rate in over a year in Q2
September 9, 2016
In the first half of the year, Turkey’s economy decelerated against the backdrop of political unrest and rising geopolitical conflicts. Following a revised 4.7% increase in Q1 (previously reported: +4.8% year-on-year), GDP expanded 3.1% annually in Q2, which marked the slowest increase since Q1 2015. The print came in below the 4.0% increase expected by the market and was driven by a deterioration in both domestic and external demand.
Private consumption expanded 6.8% in the second quarter, which was a slowdown compared to the 7.6% increase seen in the first quarter. Geopolitical threats and political uncertainty hit fixed investment in Q2, which contracted 0.6% on an annual basis. The figure was down from Q1’s flat reading. Conversely, a more supportive fiscal stance propelled government spending to increase 15.9% in Q2, which was up from the 10.9% seen in the first quarter and marked the fastest rise since Q4 2009.
On the external side of the economy, exports suffered from weak global demand and grew a meagre 0.2% in the second quarter, which was down from the previous quarter’s 2.4% increase. On the other hand, growth in imports accelerated from 7.3% in Q1 to 7.7% in Q2, thus hitting the highest figure since Q4 2013. As a result, the external sector’s net contribution to overall growth deteriorated from minus 1.5 percentage points in Q1 to minus 2.1 percentage points in Q2.
A quarter-on-quarter analysis corroborates the deceleration suggested by the annual figures. GDP rose 0.3% over the previous quarter in seasonally- and calendar-day adjusted terms in the second quarter. The reading was below the 0.7% increase observed in Q1.
In the quarters ahead, the economy will continue to be supported by domestic demand. However, the ongoing war with the Kurdish militants, lower tourism receipts and a gradual recovery in global oil prices cloud the growth outlook. In late September, Moody’s downgraded the country’s credit rating to Ba1, which is equivalent to junk status amid a slowing economy and risks related to the country’s external funding requirements. This put pressure on the lira and Turkish stocks. On 26 September, the currency traded at 2.98 TRY against the U.S dollar, which was nearly a 1.0% depreciation compared to the same day of the previous month. Against the euro, the lira lost 1.4% and traded at 3.35 TRY per EUR on the same day.
Author: Dirina Mançellari, Senior Economist