Turkey: Economic activity remains on recovery path

Economic activity in 2Q contracted by 1.5% year-on-year, better than the consensus estimate of a 2.0% contraction, though close to our call at -1.6% YoY. In seasonal and calendar adjusted terms (SA), growth momentum maintained a healthy pace at 1.2% quarter-on-quarter, after moving into positive territory at 1.6% QoQ one quarter ago. TurkStat made some minor revisions to the headline GDP data in the first quarter (from -2.6% YoY to -2.4% YoY). The data confirms that the worst is behind us thanks to stimulus measures introduced by the government and a supportive fiscal stance.

Looking at the spending breakdown, private consumption and investment contributions to the YoY GDP performance remained soft at -0.6 percentage points and -7.1pp, respectively. However, the contraction in private spending moderated from the previous quarter to -1.1% YoY, while investments weakened further to -22.8% YoY, the biggest drop since the global financial crisis. Both construction and machinery & equipment investments were major drags, showing the extent of the deterioration in investment demand in the aftermath of the financial volatility last year. The more modest contraction in private consumption is likely attributable to government incentives and a relative recovery in sentiment in late May and June. Investment weakness was likely due to a negative turn in the credit impulse in 2Q following state bank-driven loan growth in 1Q.

Public consumption, which has positively contributed to the growth performance since the second quarter of 2017 continued to do so, with a 3.3% YoY increase, lifting 2Q growth by 0.5ppt. This was reflected in the continued expansion of the annual budget deficit to 2.6% of GDP from 2.3% of GDP in 1Q (1.9% in 2018).

Net trade also had a positive contribution at 5.7pp. Exports maintained their uptrend, with an 8.1% increase thanks to improving price competitiveness, while imports contracted by 16.9% on the back of weaker demand. Finally, the contribution from inventory was slightly positive after four consecutive negative prints, suggesting significant inventory depletion.

Among sectors, construction stood out, detracting -1.0pp from growth, the weakest among sectors, followed by industry at -0.5pp. With the exception of a few sectors (i.e construction, real estate activities), the contribution of all other sectors somewhat improved compared to a quarter ago, confirming that the recovery process has been broadening.