Turkey: Robust growth in the first quarter, but a downturn is likely

First-quarter GDP showed the impact of strong consumer demand and continuing support from external demand. However, recent high-frequency growth indicators point to a deceleration in economic activity

Turkish GDP expansion was revealed to be 7.3% on a year-on-year basis, higher than the market consensus (7.1%) and ING's call (6.0%), despite headwinds from the Russia-Ukraine conflict. A breakdown of year-on-year growth reveals continuing support from private consumption and net exports which was also the case in the last quarter of 2021, while investment activity has remained relatively subdued.

First-quarter GDP, on the other hand, translates into a quarter-on-quarter growth rate of 1.2% after seasonal adjustments, showing some further momentum loss with the lowest quarterly reading since end-2020. However, it is still strong given the continuing impact of last year's financial volatility and the risks posed by geopolitical developments. Sequential performance is mainly attributable to stock building, while there is also support from capital formation and net exports.

Quarterly growth (%, YoY)

On the demand side, private consumption has remained strong with 19.5% YoY growth, and this has turned out to be the major driver with an +11.6ppt contribution to the headline GDP expansion in the first quarter of 2022. The breakdown reveals a balanced outlook with strong support from both goods and services. This shows the continuation of robust household consumption given inflation fears and negative real rates, leading to fewer savings and the bringing forward of future spending.

After a weak performance in the second half of 2021, investments turned positive at 1.1% YoY, translating into a +0.3ppt contribution to the headline reading. However, this still points to subdued activity despite various measures and an accommodative policy stance to boost investment demand. Breaking this down, machinery and equipment investments rose by 10.5%, the ninth positive reading in a row, while construction investments have remained in the negative territory.

Other points to note are:

Public consumption added 0.1ppt to the headline after a drag in 4Q21.
Inventory build-up shaved more than 8.0ppt off growth.
Net exports raised the headline growth by +3.5ppt, the biggest contribution after household consumption. This is attributable to continuing strength in exports up by 3.9% YoY, despite 0.5% YoY growth in imports.

Drivers of growth (ppt contribution)

In the sectoral breakdown, all sectors, with the exception of construction, lifted the headline growth signalling broad-based support for economic activity. Among positive drivers, services, once again, was the biggest contributor, pulling the first quarter performance up by 3.3ppt, followed by industry at 1.6ppt as indicated by industrial production data, and the financial sector at 1.2ppt.

Overall, first-quarter GDP showed the impact of strong consumer demand and the continuing support from external demand which were also the major drivers last year. However, recent high-frequency growth indicators point to a deceleration in economic activity. This is because of:

PMI readings below the 50 threshold in the last two months.
Below 50 sectoral PMIs since the beginning of this year including food, non-metallic minerals, basic metals, machinery and metal, wood and paper, showing half of the sectors covered in the data.
A continuous decline in electricity consumption (30-day moving average) that turned negative in the second half of April.
A moderation in retail volumes.

An accommodative policy stance, as is evidenced by strong primary spending and deeply negative real interest rates, should be supportive in the near term. However, economic activity during the rest of the year will likely lose momentum given deteriorating purchasing power, higher FX volatility, as well a less supportive global backdrop with tightening global central bank policies and elevated geopolitical risks.