In recession, of a balance sheet kind

TURKEY - Report 11 Mar 2019 by Murat Ucer

The Turkish GDP contracted by 2.4%, q/q, in Q4, after a 1.6% contraction in Q3 (revised down from 1.1% previously), broadly in line with expectations, which also means that by the widely-accepted popular and technical definition of recession (of two consecutive quarters of sequential decline), the Turkish economy entered recession in the third quarter of last year. Notably sequential growth rate was revised down for the previous two quarters as well, with no growth in Q2 now, q/q, suggesting that the economy has barely avoided entering recession as early as in the second quarter of last year, importantly, way before the Pastor Brunson crisis.

In annual terms GDP contracted by 3% in Q4, which, together with some revisions to previous quarters, left us with 2.6% growth for the year as a whole, sharply down from 7.4% in 2017, and markedly lower than the NEP projection of 3.8%. It is worth adding that last year’s developments corroborate a well-known feature of the Turkish economy: the existence of strong correlation among capital inflows, credit growth and economic activity.

On the demand side, thanks to a 10.6% increase in exports and 24.4% decrease in imports, y/y, net foreign demand made a very strong contribution to GDP growth (at over 8 percentage points), but this was more than offset by domestic demand contraction and stock drawdowns. Except for a slight increase in government consumption, all domestic demand components showed very sharp annual declines. After growing by some 0.8% in Q3, private consumption as such contracted by nearly 9% in Q4, which, incidentally, marks the sharpest drop since the Global Financial Crisis, while total investment declined by around 13%, y/y, with construction and machinery/equipment investment dropping by 5.8% and 25.8%, y/y, respectively.

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