Slowing Growth in Turkey May Prompt Central Bank to Ease Further

  • Economy grew 3.1 percent; median in survey was 3.7 percent
  • Slowest rate in over a year driven by weaker consumption

Turkey’s economic growth slowed in the second quarter, as spending by households and private companies weakened even before the disruption caused by July’s failed coup.

Gross domestic product expanded 3.1 percent in the April-to-June period, compared with 4.7 percent in the previous quarter and a median estimate of 3.7 percent in a Bloomberg survey. Seasonally adjusted output rose 0.3 percent from the previous quarter, Turkstat said Friday. It’s the first time that growth has lagged estimates since the third quarter of 2014.

Signs of strain in household consumption, while still relatively robust, are likely to give more leeway for the central bank to continue easing because it makes up about two-thirds of the economy. A key gauge of investments by private companies also slumped on an annual basis, while a drop in industrial production that began in the second quarter signals a “significant slowdown” in the current period, Finansbank AS Chief Economist Gokce Celik said.

“Despite the persistence of inflation, we think downside risks to the growth outlook will encourage the central bank to lower the marginal funding rate further -- unless global sentiment changes dramatically,” Celik said in an e-mailed note. The bank may loosen credit conditions beyond rate cuts, she said.


The bank lowered its overnight lending rate -- also known as marginal funding -- by 225 basis points over six months, to 8.5 percent in August. Following the failed attempt by a section of the military to overthrow the government in July, the bank eased reserve requirement rules three times to boost lira and foreign-exchange liquidity and bring residents’ gold into the economy.

While consumption remained strong at the time of the cuts and still made the biggest contribution to the annual growth figure, spending growth has weakened compared to the first quarter. Household consumption rose 5.2 percent on annual basis in the latest data, but contracted by half a percentage point from the previous three-month period.

Spending in the first quarter was boosted by an increase to the official minimum wage, resulting in the quarter-on-quarter decline, Celik said.

Private investments contracted 1.6 percent from a year earlier, Friday’s data showed, while companies’ spending on machinery and equipment slumped 5.3 percent -- the biggest drop in two years.

Construction Boom

The drop in investments in machinery was offset by a surge in companies’ spending on construction, Deputy Prime Minister Mehmet Simsek said in an e-mailed statement after the data release. With the economy facing global headwinds, Turkey must increase domestic savings and investments to keep high-pace growth, Simsek said.

Government spending, which makes up about 12 percent of GDP, rose 15.9 percent from a year earlier, the biggest annual jump since 2009. The size of Turkey’s annualized economy in current prices rose to $708.5 billion in the 12 months through June, from $707.8 billion the previous quarter.

The lira was trading 0.3 percent weaker at 2.9593 per dollar at 12:24 p.m. in Istanbul, bringing the year-to-date loss to around 1.4 percent, the worst performance among 10 emerging market currencies tracked by Bloomberg in Europe, the Middle East and Africa.

The yield on Turkey’s ten year lira bonds rose 11 basis points to 9.68 percent, poised for the biggest jump this month.

Though weaker economic activity may encourage more easing by the central bank, interest rate decisions are increasingly influenced by the lira’s performance, Capital Economics senior emerging markets economist William Jackson said after the data.

“So long as the lira remains pretty steady, we may see further rate cuts,” Jackson said by e-mail. “For now, we expect the overnight lending rate to be cut to 8 percent by the year-end, but there’s certainly a risk that it goes further.”

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