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2019-01-11

Turkey Economics In Peril Jan. 2019




Is Turkey in complete shambles?
The economy likely recorded a dismal fourth quarter, as the impact of the August 2018 currency crisis continued to reverberate. The manufacturing PMI was firmly in contractionary territory throughout the period on shrinking output and new orders, while business sentiment was decidedly pessimistic. Moreover, consumer spending was hit by higher interest rates, still-elevated inflation and depressed household sentiment, with retail sales declining sharply in October and vehicle sales plummeting throughout Q4. This comes after comprehensive data showed that GDP growth slowed sharply in Q3 on soft private consumption and fixed investment. More positively, the lira has recovered substantial ground since September, while external rebalancing continues apace, with a third consecutive monthly current account surplus in October. On the political front, President Erdogan announced a second 100-day plan in December. According to the president, it contains projects worth TRY 24 billion, which could provide a mild boost to demand going forward. Moreover, the government recently extended temporary tax cuts until the end of March, in a bid to fight inflation and support consumer spending. • The economy is set to perform poorly this year, depressed by restrictive financial conditions constraining private consumption and fixed investment. However, the external sector should provide some support. Currency volatility and the possibility of renewed geopolitical tensions pose significant downside risks. FocusEconomics panelists expect the economy to flatline in 2019, down 0.2 percentage points from last month’s forecast, and 3.1% in 2020. • Inflation fell from 21.6% in November to 20.3% in December. Price pressures should ebb in 2019 on a tighter monetary stance and tepid domestic demand, although the recent minimum wage hike will slow the decline. Our panel sees inflation ending 2019 at 15.1% and 2020 at 11.1%. The possibility of a further sharp currency depreciation, premature monetary loosening and a spending splurge in the build-up to local elections in March 2019 pose upside risks to the outlook. • At its 13 December meeting, the Central Bank left the one-week repo rate at 24.00%, to tame inflation and support the lira. The Bank is likely to maintain its tight stance in the short-term, before beginning an easing cycle later in 2019 as inflation ebbs. Our panelists see the one-week repo rate ending 2019 at 19.49% and 2020 at 15.22%. • On 4 January, the lira traded at TRY 5.33 per USD, strengthening 1.0% from the same day of the previous month. The lira is likely to depreciate going forward, with the currency set to remain vulnerable to a resurgence of friction with the U.S. and market skepticism over monetary policy independence and the government’s commitment to fiscal prudence. Our panelists see the exchange rate ending 2019 at TRY 6.29 per USD and 2020 at TRY 6.57 per USD

REAL SECTOR
Growth slows massively in Q3
According to data released by Turkstat on 10 December, the Turkish economy lost further steam in Q3, amid significant financial market and exchangerate turbulence, soaring inflation and higher interest rates. 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 this year as the impact of the currency crisis subsides. FocusEconomics Consensus Forecast panelists see GDP flatlining in 2019, which is down 0.2 percentage points from last month’s forecast, before expanding 3.1% in 2020.

Industrial production falls in October Industrial production declined 5.7% in October in calendar-adjusted year-on-year terms, a deterioration from September’s revised 2.4% decrease (previously reported: -2.7% year-on-year). October’s reading was driven by contractions in the manufacturing, and electricity, gas, steam and air conditioning supply sectors, while the mining and quarrying sector grew solidly. On a seasonally- and calendar-adjusted month-on-month basis, industrial output fell 1.9%, up from September’s 2.6% drop. Annual average growth in industrial output fell from 6.9% in September to 5.7% in October. Industrial production is likely to continue to perform poorly in the months ahead, dampened by high domestic interest rates and weak domestic demand. FocusEconomics Consensus Forecast panelists expect industrial production to rise 0.7% in 2019, which is down 1.0 percentage points from last month’s estimate. The panel sees industrial output increasing 3.3% in 2020.

Consumers grow gloomierin December The consumer confidence index, published by the Statistical Institute in cooperation with the Central Bank, worsened from 59.6 in November to 58.2 in December. As a result, the index moved further below the 100-point threshold that separates pessimism from optimism among Turkish households. Weak consumer confidence readings throughout Q4 bode poorly for private consumption in the period. December’s dip was driven by consumers’ less optimistic views regarding the labor market, general economic conditions and their personal financial conditions. Nevertheless, consumers grew slightly more upbeat about their ability to save. FocusEconomics Consensus Forecast panelists see private consumption declining 1.5% in 2019, which is down 0.4 percentage points from last month’s forecast, before expanding 3.1% in 2020...

Inflation dips in December Consumer prices fell 0.40% from the previous month in December, up from November’s 1.44% decrease, according to data released by the Turkish Statistical Institute (Turkstat). December’s drop was chiefly driven by lower prices for clothing and footwear; and transport. Inflation fell from 21.6% in November to 20.3% in December, the second consecutive monthly slowdown, while core inflation went down from 20.7% to 19.5%. The lessening of price pressures was likely driven by numerous factors, chiefly government tax cuts on some goods, temporary price discounts, lower oil prices and the recovery in the lira. Looking to Q1, a less supportive base effect will keep inflation elevated, although this could be partly offset by the recent announcement that tax cuts will be extended till end-March. Over the rest of the year, inflation should gradually ease on weak domestic demand, although a 26% minimum wage hike will likely slow the decline. The evolution of the volatile lira and monetary and fiscal policy will be key factors to watch. FocusEconomics panelists see inflation closing 2019 at 15.1%, which is up 0.5 percentage points from last month’s forecast, and 2020 at 11.1%.

Central Bank keeps rates unchanged in December 
At its monetary policy meeting on 13 December, the Central Bank of the Republic of Turkey (CBRT) left the one-week repo rate unchanged at 24.00% for the second consecutive month. The Bank’s decision to keep rates at their current high level was motivated by a desire to consolidate the strengthening of the lira observed in recent months, as well as to temper inflation, which is still extremely elevated despite dipping in November. Any rate loosening would have risked damaging the Bank’s credibility—already shaken following a period of policy inaction earlier this year—and putting downward pressure on the currency. On the other hand, with price pressures dipping and domestic demand depressed, the CBRT saw no need for further tightening. In its communiqué, the Bank’s language was slightly less hawkish than at the previous meeting. However, the CBRT reiterated its commitment to a tight monetary stance “until [the] inflation outlook displays a significant improvement”—taking into account fiscal policy, inflation expectations and the lagged impact of previous rate hikes—and left the door open to future rate hikes if required. According to analysts at Unicredit: “Considering the inflation outlook, we do not think that the CBRT will have room to cut before late 2Q19. Having said that, we cannot rule out the possibility that political calls for lower interest rates will resume in the run up to the local elections, which are expected on 31 March 2019.” Our panellists expect the one-week repo rate to end 2019 at 19.49% and 2020 at 15.22%