Turkey: No change in growth drivers

Turkish GDP grew 4.0% year-on-year in the first quarter, slightly better than the market consensus at 3.9% (vs our call at 3.6%), on the back of private consumption, government consumption and gross fixed capital formation, while net exports were a drag again.

1Q GDP translates into quarter-on-quarter growth of 0.3% after seasonal adjustments, showing some momentum loss in comparison to a relatively strong reading in 4Q, at 0.9%. This moderating sequential performance is attributable to 1) a deceleration in household consumption, which saw the lowest growth rate since the last quarter of 2020, also likely reflecting the impact of the earthquakes and 2) government expenditures turning negative while stocks positively contributed to the headline rate and investment appetite remained solid.

When we look at the breakdown in expenditures, we see that private consumption maintained its strong pace, with a 16.2% YoY growth rate. This was the major driver with a +10.8ppt contribution to the headline GDP expansion. Continuing improvement in consumer confidence, likely attributable to stability in the exchange rate, provides evidence of strength in consumption.

Regarding the investment appetite, construction investment, which has been generally weak since the financial volatility in 2018, grew in the low single digits in the first quarter after turning positive in the fourth. Machinery and equipment, which has followed a strong path since late 2019, recorded a healthy 8% YoY expansion after considerable momentum loss in 4Q when it recorded growth of just 2.3% YoY. Accordingly, first-quarter investment growth was at 4.9% YoY, translating into a 1.2ppt contribution to the headline rate.

Among others: i) public consumption, which has positively contributed to growth continuously in the last seven quarters, continued to do so, with a 5.3% YoY increase, lifting 1Q growth by 0.7ppt. This was reflected in the continuing expansion in primary expenditures with a large primary deficit in 1Q from a primary surplus over the same period of 2022 ii) inventory build-up shaved 5.9ppt off growth, and lastly, iii) net exports continued to pull headline growth down by -2.8ppt. This is attributable to accelerating imports vs negative export growth amid a deteriorating growth outlook in Turkey’s export markets.

In the sectoral breakdown, as signalled by the industrial production data, industry was a drag, subtracting -0.1ppt from 1Q growth. Among positive drivers, services, once again, were the biggest contributor, pulling the first quarter performance up by 3.0ppt, followed by financial services, at 0.6ppt.