Turkey: The economy starts to slow down, lower growth expected

Turkey’s economy grew by 3.9% YoY (Tera: 4.8%, consensus: 4.4%) in 3Q22, declining sharply from the revised 7.7% growth performance in 2Q22, marking the beginning of a loss of momentum. In seasonally and calendar adjusted data, quarter-to-quarter growth was -0.1%, the first periodical negative realization since the pandemic hit 2Q20.

Slower annual growth and quarterly contraction were in line with expectations, but we observe that the data obtained are somewhat more negative. Even though household demand is giving positive support with higher-than-expected growth, we expect high inflation to damage the demand channel more in terms of 4Q22. Within the framework of these data and assumptions, we expect a growth of 5.5% for the whole of 2022.

Turkey’s Growth Begins to Slow Down… Comparison of real GDP growth rate (seasonally and calendar adjusted) and long-term growth path… (Based on 1Q19, the beginning of the pandemic, the chain volume index has been normalized with Factor 100.) Source: Bloomberg, TUIK, Tera Yatırım

Looking at the sub-items; Household consumption, an indicator of domestic demand that makes a significant contribution to growth, increased by 19.9% ​​compared to the previous year. In 2Q22, consumption expenditures of households, which show the state of domestic demand, grew by 22.5%. Household finances came under pressure, while consumer spending remained resilient enough to power the economy. This shows that households prioritize their purchases with the expectation that inflation will consume their disposable income. Considering the high inflation environment, we think that as the income level decreases, the front-loading capacity will decrease and drive the discretionary consumption expenditure part down. Therefore, we expect less contribution from the demand channel and slowdown in consumption expenditures growth as of 4Q22. Although the highly anticipated minimum wage increase, which is expected to be announced in December, provides a short-term boost to households against inflation, we do not see this effect as long-lasting in the inflationary period.

Gross fixed capital formation, a measure of investment by businesses, shrank by 1.3% annually. We observe that machinery and equipment investments made a positive contribution with a growth of 14.3%. While construction investments decreased by 19.9%, other assets increased by 15.7%. Gross capital formation increased by 5% in 2Q22. Tight controls on lending and the highest inflation in the G-20 after Argentina put pressure on private capital expenditures.

The government’s consumption expenditures increased by 8.5% compared to the previous year. Government final consumption expenditures increased by 2% in 2Q22. Since the annual growth rate is the lowest in the post-pandemic period, it will be effective in the loose ground and growth origin of the fiscal policies before the election.

Exports increased by 12.6% and imports by 12.2% on an annual basis. Thus, it is understood that there is a limited contribution from net exports in terms of foreign demand indicator. Despite the economic approach that focuses on export growth, the contribution in this area will decrease further as the threat of recession appears in Europe, which is its biggest trading partner. Data at the beginning of 4Q22 show that the import momentum is well above the export momentum and exports have almost stagnated. Annual export growth, which was double-digit until August this year, declined to single-digit growth with 9.1% in September and only 3% growth in October.

Turkey’s Export Growth Slows, Threatens the Economy… Source: TurkStat, Ministry of Commerce, Bloomberg, Tera Yatirim

The contraction in the construction sector (-14.1%) draws attention. Here, both the contraction revealed by the housing sales statistics on the real estate side and the general contraction in the construction sector seem to have had a double-sided effect. We can say that the share of the construction sub-item in the national income was approximately 15%, which was effective in slowing down the general growth and remaining below expectations. On the industry side; Seasonally and calendar adjusted 3-month average industrial production data revealed the loss of momentum. In the growth data confirming this slowdown, it is seen that the contribution from the industry was realized at a lower level (industry +0.3%). The slowdown effect in the services sector (from +18.1% in 2Q22 to +6.9% in 3Q22) was also realized by the high inflation effect. The spread of inflation from food and the inertia in almost all items cause annual inflation in services items to be high and expectations deteriorated. This explains the decline in the service sector’s contribution to GDP.

Private consumption expenditures contributed +12 points to total growth, while public expenditures contributed +1 points. Net foreign demand made a positive contribution by 0.7 points. Investment expenditures made a negative contribution to growth by 0.33 points. Stock changes, on the other hand, affected growth negatively by 8.3.

The growth performance throughout the year still points to one of the strongest performances in the G-20. The sustainability of Turkey’s growth path in the upcoming period, of course, depends on the components of domestic/external demand and the state of business investments. In this context, It is known that President Mr. Recep Tayyip Erdoğan wants to implement an economic model that prioritizes exports, production and employment. Although the Central Bank wanted to support it with a series of interest rate cuts during this period, we are faced with a situation where inflation reached 85.5% due to the effects of the depreciation of the lira. After 3Q22, exchange rates remain very stable for a few months. In this environment, it seems likely that the government will continue with various measures to stimulate the economy before the elections scheduled for June.

Despite the Slowdown, Turkey Remains Among the Highlights in the G-20… The Central Bank resumed interest rate cuts with the loss of economic momentum… Source: Bloomberg, Tera Yatırım

If we look from the point of view of the Central Bank; The Bank, which started a new easing cycle in August, lowered the policy rate to 9%, to single digits, in November. The rate cuts, which did not create a marginal effect recently, brought about a serious deterioration in price stability and depreciation of the lira at the end of 2021. Growth averaged 6.4% in the first 3 quarters (1Q22: 7.5%, 2Q22: 7.7% and 3Q22: 3.9%). However, the economic momentum is now slowing down to its slowest point after the pandemic, and businesses and households are forced to cover more inflation damage. We consider the inflation-feeding effects of the approach other than conventional economic policies as a reservation in this area.

In line with these realizations and inferences from the current leading indicators, we still expect a growth of 5.5% for 2022. Meanwhile, with the downside effects of exports and deceleration in industry, we consider a slower growth path of 2.8% for next year.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı