Turkey: 2Q20 contraction in single digits

The Turkish economy recorded a 9.9% year-on-year contraction with a better-than-expected performance in the second quarter. In seasonal and calendar adjusted terms (SA), the activity narrowed by -11% quarter-on-quarter with the breakout of the pandemic. This is the sharpest ever quarterly drop since the start of the GDP series in 1998, and was mainly driven by record sequential fallls in private consumption and collapse in exports with pandemic-related restrictions.

Looking at the spending breakdown:

• Heavy-weight private consumption recorded a 8.6% YoY decline and turned out to be one of the major drags with a -5.0 percentage point contribution to the growth in 2Q20. Significant consumer credit momentum with markedly lower rates limited the downside during the pandemic.
• Thanks to the countercyclical policies adopted, public consumption that has been lifting GDP every quarter since the second half of 2017 was barely negative, providing a mere -0.1ppt to the headline.
• Gross fixed capital formation contracted at a lower-than-expected rate on the back of strength in the credit impulse with the state banks at the forefront and later participation of private banks. Accordingly, investment consumption recorded -6.1% YoY growth, translating into a -1.5ppt contribution, driven by construction investments, whereas machinery & equipment investments posted another positive 4.7% YoY growth in 2Q20 following double-digit increases in the previous quarters. Investment are likely to be on the recovery phase in the near term as companies restore production capacity but indebtedness of the corporate sector will remain an important drag on new investments.
• Anther major contracting item in 2Q20 was net exports, reducing the headline growth with another -7.8ppt in the first quarter. This is attributable to the sharp drop 35.3% YoY in exports given the impact of pandemic on the goods trade and tourism with global mobility restrictions. Imports, on the other hand, fell by 6.3% YoY, lower than expected given that credit stimulus prevents imports from falling more sharply in the second quarter.
• Finally, we saw contribution of inventory drawdown with +4.5ppt, the fourth in a row. These large inventory contributions in recent quarters likely reflect some measurement problems.

In the sectoral breakdown, services and industry turned out to be the key drivers of contraction, pulling the second quarter performance down by 5.9ppt and 3.3ppt respectively. On the flip side, strong credit activity should help the financial sector to lift the growth by 1.5ppt.