Turkey: GDP growth moderates less than expected in the fourth quarter
Although some of the tailwinds that had propelled economic activity in the first three quarters of last year have faded, the Turkish economy decelerated less than expected in the fourth quarter. Aided by ongoing fiscal stimulus and a favorable external backdrop, GDP expanded 7.3% on an annual basis in Q4, coming in below the 11.3% surge recorded in the previous quarter but surpassing market expectations of a softer 5.3% expansion. The Q4 GDP figure rounded off a year of strong growth in Turkey, with credit and fiscal impulse buttressing households, and a weakened lira and solid European and Russian demand supporting exports. The economy grew 7.4% in full-year 2017, a four-year high and more than double the 3.2% expansion recorded in 2016.
The domestic sector accounted for the bulk of the quarter’s expansion once again, despite a broad-based moderation. Household spending continued to be the main driver of growth, increasing 6.7% in annual terms on the back of ongoing fiscal stimulus and positive wealth effects stemming from a weak lira—households had increased their foreign exchange holdings in previous quarters. That said, the result marked a deceleration over the 11.0% jump recorded in the third quarter, which had been buoyed by a positive base effect and temporary tax relief on major appliances and furniture. Conversely, government consumption accelerated in the fourth quarter, expanding 7.4% compared with a 6.7% increase in the previous quarter.
On a similar note, fixed investment growth decelerated in the fourth quarter but remained relatively resilient. Capital outlays increased 6.0% in year-on-year terms, more than half the 13.2% jump recorded in the third quarter. Softer fixed investment reflected weaker growth in spending in construction and in machinery and equipment, which partially resulted from the ebbing effects from a depleted Credit Guarantee Fund and nationwide campaigns on residential investment. The latter was also observable in a breakdown of GDP data by activities, with construction activity decelerating markedly in the fourth quarter.
Meanwhile, the external sector acted as a drag on growth for the first time in a year, with solid domestic demand buoying imports. Imports were up a noticeable 22.7% in annual terms in the fourth quarter, the largest increase since Q1 2011 and above the 15.0% expansion recorded in the previous quarter. Although shipments overseas benefited from improved external demand, export growth decelerated to 9.3% in the fourth quarter from a 17.9% leap in the third quarter. As a result of import growth outpacing that of exports, the external sector’s net contribution to overall growth swung from a positive 0.4 percentage-point contribution in Q3 to a 3.1 percentage-point subtraction in Q4, the largest drag since Q2 2011.
Looking ahead, the economy is expected to continue cooling off in the quarters to come as the tailwinds that boosted growth dissipate and households see their disposable income shrink amid persistently-high inflation and ebbing fiscal stimulus. Nonetheless, the government’s bias to keep the economy growing at a solid clip, and increasing speculation over an early call for general elections could see renewed fiscal pressure in the short-term, which bodes well for Turkey’s near-term economic forecasts.