Turkey: Growth slows massively in Q3
December 10, 2018
According to data released by Turkstat on 10 December, the Turkish economy lost further steam in Q3, amid significant financial market and exchange-rate turbulence, soaring inflation and higher interest rates during the period. Economic growth dimmed to a mere 1.6% in Q3, below market expectations and down from Q2’s revised 5.3% (previously reported: +5.2% year-on-year).
Domestic demand weakened considerably in the third quarter. The expansion in private consumption slowed to 1.1% (Q2: +6.4% yoy), depressed by intensifying price pressures and weaker consumer sentiment. Meanwhile, fixed investment declined sharply (Q3: -3.8% yoy; Q2: +4.2% yoy) on lower investment in construction, and machinery and equipment. In contrast, government spending growth maintained the robust momentum observed in the build-up to the June elections (Q3: +7.5% yoy; Q2: +7.8% yoy).
The external sector strengthened notably in the third quarter, due to the weaker lira and soft domestic demand. Exports of goods and services increased 13.6% (Q2: +4.2% yoy), while imports contracted 16.7% (Q2: +0.2% yoy). As a result, the external sector contributed 6.7 percentage points to growth, up from Q2’s contribution of 0.9 percentage points.
Looking ahead, the economy is likely to contract over the next few quarters, as still-elevated price pressures, tight financial conditions and weak sentiment depress domestic demand. However, the external sector should continue to provide support thanks to increased price competitiveness. The economy should return to growth in the second half of next year as the impact of the currency crisis subsides.
Author: Oliver Reynolds, Economist