Turkish economy shrinks less than expected in second quarter

The Turkish economy contracted 1.5 percent year-on-year in the second quarter, better than expectations, and recorded another positive quarter-on-quarter reading as it looks to shake off the effects of recession after last year’s currency crisis.

Compared with the first quarter, gross domestic product (GDP) expanded at a seasonally and calendar-adjusted 1.2 percent pace, its second positive quarter-on-quarter reading in a row, data from the Turkish Statistical Institute, released on Monday, showed. 

“When the activities which constitute the GDP were analysed, the total value added increased by 3.4 percent in the agricultural sector, decreased by 2.7 percent in the industry sector and 12.7 percent in the construction sector and 0.3 percent in the services sector (wholesale and retail trade, transport, storage, accommodation and food service activities) compared with the same quarter of last year in the chain linked volume index,” the institute said. 

Turkey‘s economy has a track record of more than 5 percent growth, but inflation and interest rates soared after the Turkish lira lost some 30 percent of its value last year, and domestic demand fell sharply.

Measured annually, Turkey’s economy has contracted for the past three quarters. 

Consumption in the latest quarter was stronger than economists predicted and net exports, helped by the weak lira, also limited the annual contraction, suggesting a recovery may have taken hold.

“We think the rise from the bottom started as of Q2,” wrote Muammer Komurcuoglu, an economist at Is Yatirim, an investment banking company, told Reuters news agency. 

“But the recovery is fragile for now and the extent of it will be determined by the course of central bank interest rate cuts and global risk appetite.”

Resurgent lira?

The lira strengthened beyond 5.80 to the US dollar after the data, from 5.8175 immediately before. It stood at 5.8130 at 0832 GMT. 

Last year’s currency crisis, brought on by a diplomatic row with Washington and doubts about the independence of the central bank, ended years of a construction-fuelled boom driven by cheap foreign capital. 

The lira is down another 9.6 percent this year, but a dip in inflation in recent months opened the door for the bank to slash rates below 20 percent in July and begin a monetary easing cycle. 

Business investment, held down by high borrowing costs and currency uncertainty, fell in the second quarter to help keep overall year-over-year GDP negative. Industrial production weakened significantly in June.

But other data suggest a turnaround in the Middle East‘s largest economy despite risks ahead, including a trade war that could lead to a global slump. 

A PMI business survey published separately on Monday showed that after 17 months of contraction, Turkish manufacturing activity declined only modestly in August, suggesting firms may be readying for a return to growth. 

The government also made revisions to GDP data going back to early 2017 – including a slightly smaller annual contraction of 2.4 percent in the first quarter of 2019 – which generally showed a bit stronger past performance. 

Jon Harrison, head of emerging markets macro strategy at TS Lombard, a research company, said he still expects the economy to contract this year. 

The GDP data “confirms that growth is not doing very well and although it is moderately better than expected … concerns are still there about whether there will be an overshoot of monetary policy, and a renewed depreciation in the currency,” he told Reuters. 

Last September, the Turkish government announced an economic programme that aimed at an economic growth rate of 2.3 percent this year, 3.5 percent next year and 5 percent by 2021.

Polls by Reuters news agency and Turkey’s Anadolu news agency both predicted the economy to contract by more than the 1.5 percent announced on Monday. Anadolu’s poll forecast the figure at 1.8 percent, while Reuters estimated it would be a full 2 percent.