Poll suggests Turkey falling short of growth targets, recession in progress

Turkey’s economy began contracting in the last quarter and won’t grow again until the
third quarter of 2019, while growth will miss government forecasts through 2021, a Reuters poll found, underscoring the serious damage caused by a currency crisis.

The Turkish lira collapsed nearly 30 percent against the US dollar last year, pushing up the price of everything from food to fuel and sending annual inflation to a 15-year-high of more than 25 percent.

Investor concerns about President Tayyip Erdogan’s influence over monetary policy and a diplomatic rift between Ankara and Washington sparked a sell-off in the lira and prompted the central bank to hike rates aggressively.

The lira has regained some of its losses since Aug. 13, when it hit 7.24 against U.S. dollar, but investors are now worried about the lagged impact of the crisis on the wider economy and potentially on the banking sector.

Turkey’s economy will expand just 0.2 percent this year and by 3.0 percent next year, the poll of 51 economists showed - well below the government’s sharply lowered respective forecasts of 2.3 and 3.5 percent.

“We expect that the slump in Turkey’s economy will be deeper than most envisage. GDP growth will weaken sharply and is likely to hit a trough in Q1,” Capital Economics said in a note, adding that the economy would slowly recover later this year.

The poll also showed Turkey’s economy was expected to have shrunk by 2.7 percent in the fourth quarter of 2018, faster than a 1.4 percent contraction forecast in an October poll.

Recession

The economy is likely to officially enter recession - defined as two consecutive quarters of negative growth - this quarter, with a 2.1 percent contraction, the latest poll showed. It is then estimated to contract 1.0 percent in the second quarter before turning to growth of 1.4 percent in the third.

Turkey’s economic growth dwindled to 1.6 percent year-on-year in the third quarter last year, showing its worst performance in two years.

“The issues that the Turkish economy is facing now are mainly home-grown and, as all leading indicators point toward the same direction (recession), we think a contraction is
inevitable,” said Nora Neuteboom, an economist with Dutch bank ABN AMRO.

Although fiscal spending ahead of local elections due on March 31 should be positive for growth, a slowdown in demand and investment will hurt economic performance, Neuteboom said.

Inflation is expected to average 21 percent this quarter and slow to 15.5 percent for the whole year, the poll showed.

The decline in inflation, triggered by tax cuts and price reductions encouraged by the government, caused concern over a possible premature easing of monetary policy but the central bank held rates steady at 24 percent on Wednesday.

Economists predicted that the central bank, facing frequent calls from Erdogan to cut borrowing costs, will gradually lower its main policy rate to 19.75 percent by the end of this year.

Erdogan, a self-described “enemy of interest rates”, has repeatedly called for lower borrowing costs to provide cheaper credit to companies and spur growth.

In the local elections on March 31, Erdogan’s AK Party - in power for a decade and a half - could lose control of some large cities in Turkey, including the capital Ankara and possibly the commercial hub of Istanbul, as the economy sours.