Turkey’s road to recovery looks long even as recession ends

Istanbul: Turkey exited recession in the first quarter on the back of increased lending by state banks, a temporary boost that’s since been overshadowed by the lira’s slump.

Gross-domestic product expanded 1.3 per cent from the previous three months when adjusted for seasonal impact, marking a recovery from the end of last year and matching economists’ estimates.

But activity still remains subdued compared with last year with GDP falling 2.6 per cent from the same three-month period in 2018, driven by a slump in household spending on consumption, which is traditionally the main driver of growth. A continued recovery hinges on the prospects for the lira, whose 5 per cent decline this quarter brought consumer confidence to an all-time low. The struggling currency is a risk for inflation, still stuck around 20 per cent and preventing the central bank from cutting interest rates. A controversial rerun of Istanbul elections next month is also keeping the market on edge.

“Very simply activity was boosted by looser fiscal policy and state bank-led credit expansion,” Inan Demir, an economist at Nomura International Plc in London, said after the data. “Second-quarter indicators are suggesting that lira weakness is undermining confidence — both consumer and business — which is one of the traditional channels that affect growth.”

GDP Highlights

A flurry of stimulus kicked in before March elections as lending by state banks powered gains in industrial production and retail sales. An economic turnaround in Europe, the main destination for Turkish exports, also offered a bright spot.

Credit grew for the first time since August’s market rout. Lending by state banks soared 30 per cent to 1.09 trillion liras ($181 billion) last quarter, while loans extended by private banks rose 5 per cent.

Still, early signs suggest the recovery may be losing traction. Consumer confidence dropped in May to the lowest level since record-keeping began in 2004.

Despite the possibility of a double-dip recession, the Turkish government is sticking with its growth target of 2.3 per cent for 2019. By contrast, Goldman Sachs Group Inc. and Morgan Stanley have revised down their projections for this year and now envisage a GDP decline of 2.5 per cent and 1.8 per cent, respectively.

Tensions with the US rank high among the risks ahead for Turkey. President Recep Tayyip Erdogan has rebuffed American demands that Turkey delay the purchase of a Russian S-400 missile system as the days tick down to its possible delivery this summer.

Pushing ahead with the deal carries the threat of US sanctions that could plunge Turkey into renewed economic turmoil.

“The first-quarter upturn was only really driven by fiscal pump priming” and credit growth before the municipal elections, said Timothy Ash, a strategist at Blue Bay Asset Management in London. “Confidence indicators suggest that in the second quarter, the economy double dipped, as consumers seem worried by the political backdrop.”