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Mark Bentley
Dec 04 2018

Recession or ‘rebalancing’ – Turkey’s economic downturn in dispute

Headline economic indicators for Turkey suggest the start of a painful recession, jarring with the government’s assertion that the economy is merely “rebalancing”.

Turkey’s foreign trade deficit shrank 90.5 percent to $604 million in November compared to the same month a year before, spurred by a slump in demand for imports, data at the weekend showed. It followed a year-on-year contraction of 94 percent in October. Meanwhile, headline annual inflation slowed to 22.6 percent last month, declining from 25.2 percent in October – the highest level in 15 years, according to figures published Monday.

Turkey may be tipping into recession, spurred by a slump in domestic demand, after an overheating economy and a political crisis brought a slump in the lira’s value. The Organisation for Economic Cooperation and Development (OECD) and ratings agency Moody’s are among those predicting an economic contraction next year.

The trade deficit numbers “are pointing to a painful adjustment in domestic demand,” Inan Demir, an emerging markets economist at Nomura in London, said in a response to e-mailed questions.

Imports, which surged early this year as the government stimulated demand through various incentives, shrank 21.5 percent annually in November to $16.1 billion following a 24 percent decline in October. Exports rose 9.5 percent to $15.5 billion, contributing less than a quarter to the reduction in the trade gap. They had increased 13 percent in October.

A big contraction in imports is usually a sign of a serious economic downturn in a country. But despite this, the government and central bank maintain that the economy is “rebalancing”, pointing to the trade numbers and predicting a slowdown in inflation and a stronger currency.  The rate of inflation was a negative 1.44 percent in November on a monthly basis, the biggest decline since a financial crisis in 2001. But much of that decline was due to government tax cuts on items such as cars and household appliances, the data showed.

International financial institutions expect negative economic growth in 2019, despite government measures to stimulate the economy, which also include curbs on energy price increases. Treasury and Finance Minister Berat Albayrak, the son-in-law of President Recep Tayyip Erdoğan, says the worst of Turkey’s economic troubles are over, predicting that interest rates will decline as inflation slows, spurring demand for goods and services.

Berat Albayrak
Turkish Treasury and Finance Minister Berat Albayrak

Turkey’s economy is expected to contract by 0.4 percent next year, the Organisation for Economic Co-operation and Development (OECD) said on Nov. 21. Turkey will post negative growth in the first two quarters of next year, meaning the country will be in a technical recession, ratings agency Moody’s said in early November. Economic activity will probably decline by 2 percent in 2019 after growth of 1.5 percent this year, Moody’s said.

The predictions compare with a government estimate of 2.3 percent growth for next year.

Former Central Bank Governor Durmuş Yılmaz, who served between 2006 and 2011 and is now an economic adviser for the opposition Good Party (IP), said on Nov. 21 that Albayrak was not taking responsibility for recent financial turmoil and failing to enact urgent reforms. Turkey is due to hold local elections in March.

“If you believe what you’re saying, then we’re in an even more terrible place than we thought”, Yılmaz said, referring to Albayrak’s assertion that the volatility was the fault of external forces, not the government.

The economy does however appear to be stabilising after a slump in the lira to a record low of 7.22 per dollar in August sparked fears among investors of a full-blown economic crisis. The currency has since strengthened to around 5.3 against the U.S. currency, reducing losses to about 30 percent since December 2017, helped by government commitments to budget discipline and falling global oil prices. Turkey imports almost all the energy it consumes.

But domestic demand in the country remains weak, as reflected in November imports, the inflation data and government surveys. Meanwhile, a stronger lira means exports are losing some of their competitive advantage in terms of price. 

While Turkish consumer confidence increased in November for the first time in four months, it is only edging up from the lowest point since the global financial crisis a decade ago. A benchmark index rose to 59.6 from 57.3 in October, the Turkish Statistical Institute (TUIK) said on Nov. 22. Any reading below 100 shows pessimism about the future.

But confidence among businesses is showing tentative signs of recovering from record lows. The economic confidence index, which includes retail, services, industry and construction, as well as consumers, rose to 73.7 from 67.5 in October, TUIK said last week. That was the highest level since August, when the currency crisis peaked.

The biggest gain was in industrial confidence, which climbed to 96.8 in November from 91.1 the previous month. The government is hoping that export-focused industries will grow, steering the country out of its economic troubles. However, confidence in the construction industry - a mainstay of economic growth under the Erdoğan government - fell to 56.6 from 58.7.

The Purchasing Managers Index (PMI), prepared by IHS Markits and the Istanbul Chamber of Industry, shows that overall output among Turkish producers remains very weak. While a slump in manufacturing activity moderated slightly in November to 44.7 from 44.3 in October, it declined for the eighth-straight month. Any reading below 50 points indicates a fall in activity.

After highlighting the positive impact of the lira’s recent strength on output, IHS Markit said subdued demand conditions were causing firms to use up existing stocks rather than buy new inputs, leading to both a decline in stock levels and in goods used for production. Marked slowdowns in employment and new orders continued, it said.

And while inflation data for November was better than expected and reflects “new found stability and strength of the lira”, it also shows the impact of recessionary conditions, said Tim Ash, senior emerging markets strategist at Blue Bay Asset Management in London.

“The watchword is “recession” and that could now mean further downside surprises on inflation,” Ash said.

(Story was updated to correct figure in fifth paragraph to $16.1 billion).