Turkey: Turkish economy shrinks again in Q2; outlook for next year remains vulnerable
September 2, 2019
The Turkish economy contracted for the third consecutive quarter in the second quarter on the back of weak domestic demand. The economy shrank 1.5% in annual terms in Q2, however this was an improvement from the 2.4% drop in Q1 and a tentative sign that the economy continued on the path to recovery. The print also came in above market expectations of a stronger contraction. “The latest GDP data confirms that the worst is over”, noted Muhammet Mercan, chief economist at ING Turkey. In quarter-on-quarter seasonally-adjusted terms, the economy grew 1.2%, which was down from the revised 1.6% expansion in the first quarter (previously reported: +1.3% quarter-on-quarter).
Domestic demand remained hamstrung. Private consumption fell 1.1% over the same period a year earlier (Q1: -4.8% year-on-year), amid a record-high unemployment rate in May since current records began in 2005. Moreover, still-elevated inflationary pressures, partly owing to a weakening lira, and depressed consumer sentiment continued to weigh on household spending. Meanwhile, fixed investment nose-dived in the quarter, contracting a whopping 22.8% (Q1: -12.4% yoy) and marking the largest drop in investment expenditure since Q1 2009. “Both construction and machinery & equipment investments were major drags, showing the extent of the deterioration in investment demand in the aftermath of the financial volatility last year”, Mercan added. Furthermore, government consumption rose 3.3% in the second quarter, slowing from the 6.6% rise in the first quarter. While the first quarter’s figure was boosted by election-related spending, stimulus measures still supported public expenditure in the second quarter. The research team at Goldman Sachs noted that public consumption going forward should ease as it “will need to adjust to limit the deterioration in the budget deficit.”
The external sector’s contribution continued to be positive in the second quarter, but this was partially due to frail domestic demand, as evidenced by shrinking imports. Imports of goods and services fell 16.9% over the same period a year prior (Q1: -28.9% yoy). On the other hand, price competitiveness helped to buttress export of goods and services, which increased 8.1% year-on-year (Q1: +9.2% yoy).
Looking ahead, while the Turkish economy is expected to return to growth in the second half of the year, it will likely remain on a feeble footing. The recovery should gain traction next year, however, partially aided by a base effect and the Central Bank’s monetary policy easing.
Gökçe Çelik, senior CEE economist at UniCredit, noted that downside risks to the 2020 outlook remain substantial, commenting that “sanctions imposed on Iran, tariffs and weakening Euro Area growth could limit exports, while softer global growth could affect demand for emerging market assets.” Furthermore, she pointed out that the government will have less fiscal room and that private consumption is likely to feel the pinch from price hikes.
Author: Jan Lammersen, Economist