Consumption in Turkey

Turkey - Consumption

Economic growth records slowest increase since Q2 2020 in the third quarter

GDP growth lost momentum in the third quarter, falling to 3.9% year on year, from 7.7% in the second quarter. Q3's reading marked the worst since Q2 2020 and largely aligned with market expectations of 4.0% growth.

The moderation was driven by a contraction in fixed investment, compounded by softer private consumption and exports growth. Fixed investment fell 1.3% in Q3, marking the worst result since Q2 2020 (Q2: +5.0% yoy). In addition, household spending growth softened to 19.9% year on year in Q3 compared to a 22.5% expansion in Q2, as record-high inflation took a toll on consumers’ pockets. Meanwhile, government spending improved to 8.5% in Q3 (Q2: +2.0% yoy), preventing a larger moderation in GDP growth.

On the external front, exports of goods and services growth fell to 12.6% in Q3, the lowest since Q1 2021 (Q2: +16.4% yoy). Conversely, imports of goods and services growth sped up to 12.2% in Q3 (Q2: +5.8% yoy), which was the highest reading since Q2 2021.

On a seasonally adjusted quarter-on-quarter basis, economic activity dropped 0.1% in Q3, contrasting the previous period's 1.9% expansion. Q3's reading was the first sequential contraction since the Covid-19 pandemic’s emergence in Q2 2020. This signaled that underlying momentum is slowing despite interest rate cuts in August and September.

In Q4, the growth deceleration seems to be intensifying. Further interest rate cuts in October and November, coupled with additional interest rate hikes by the Fed and the ECB, have added pressure on the lira. A weaker currency bodes poorly for import inflation and private consumption. Moreover, the Central Bank’s dovish stance left price pressures unchecked at the outset of Q4. Against this backdrop, domestic activity is likely slowing further. Additionally, the external sector should slide in the coming quarters on the back of a worldwide economic slowdown.

Muhammet Mercan, chief Turkey economist at ING, commented:

“Despite a respectable performance in the third quarter, it is quite clear that economic activity has slowed, mainly on the back of a worsening global backdrop which is leading to an adverse impact on exports. Accordingly, we look for around 5.0% growth this year and a slowdown to 2.5% next year.”

FocusEconomics Consensus Forecast panelists project the economy to expand 2.7% in 2023, which is unchanged from last month, and 3.1% in 2024.