Turkey’s third-quarter GDP growth rate has come in at an even more disappointing than expected 1.6% y/y, the lowest figure seen since the Q3 2016 economic soft spot that occurred in the wake of the failed coup, data from statistics institute TUIK showed on December 10. Within the overall decline, the biggest slump was the 5.3% y/y registered for the construction industry, not very long ago seen as the growth engine of the Turkish economy.

A Reuters poll released on December 7 forecast GDP growth of 2.0% in the third quarter and 2.8% for all of 2018, while a survey conducted by state-run Anadolu Agency predicted Q3 growth of 1.7% y/y.

“Somewhat higher than our forecasts (1%), somewhat lower than consensus (2.2%),” Nora Neuteboom of ABN Amro Bank said on Twitter.

The data also showed that seasonally and calendar adjusted GDP contracted by 1.1% q/q in Q3 following the 0.6% q/q growth registered in Q2 and 1.8% q/q in Q1.

“Not that surprising given the hard landing and rebalancing theme. Impact of devaluation and emergency rate hikes,” Timothy Ash of Bluebay Asset Management tweeted.

“The effects of August’s currency crisis caused Turkey’s economy to contract in Q3 and more timely evidence suggests that the downturn deepened and that the Turkish economy has probably entered a technical recession in Q4. Over 2018 as a whole, GDP growth is likely to come in at around 3.0%—although that will almost entirely reflect the strong start to the year. Our expectation for the economy to contract by 0.5% in 2019 is below the consensus forecast for growth of 0.6%,” Jason Tuvey of Capital Economics said in a research note entitled “Economy contracts, technical recession on the cards”.

Tuvey added: “The outturn was broadly in line with the consensus forecast collected by Bloomberg, which pointed to a contraction of 1.2% q/q, albeit a bit better than our prediction for GDP to fall by 1.6% q/q”.

Domestic demand slumped
The breakdown of the data revealed that domestic demand slumped in Q3, Tuvey noted.

“Consumer spending fell by 3.9% q/q in Q3, following a drop of 1.5% q/q in Q2, as a weaker lira—which depreciated by as much as 25% against the dollar in the midst of August’s currency crisis—pushed up inflation and eroded real incomes. Meanwhile, the sharp tightening of financial conditions weighed on investment, which dropped by 3.6% q/q. Overall domestic demand contracted by 3.5% q/q,” Tuvey said, adding: “As we had expected, though, that was partially offset by a significant boost from net trade. Export growth strengthened and imports slumped. The latter partly reflected weaker domestic demand but there have also been signs of consumers shifting their consumption away from imports to domestically-produced goods.”

“Turkish 3Q GDP came in lower than expectations showing that financial volatility in the summer and subsequent tightening to restore confidence resulted in a faster than expected rebalancing of the economy,” Muhammet Mercan of ING Bank said in a research note, adding: “The Turkish statistics office made some minor revisions to the headline GDP data in the first half, but the revisions in the breakdown are somewhat more significant”.

“Among the sectors, construction stood out with a -0.4ppt contribution, the first negative reading since 1Q15 along with professional, administrative and support service activities with another -0.4ppt deduction from the headline. All other sectors showed significant softening over the previous quarter except for agriculture and services, pulling 3Q growth up by 0.1pp and 1.0pp, respectively,” Mercan also said.

Downbeat outlook reinforced
Mercan said that the recent data reinforced the downbeat economic outlook for the months ahead with more weakness in domestic demand.

“We expect the growth outlook to deteriorate in the coming quarters, while anticipate 2018 GDP growth at 2.8% and 2019 growth at 1.5% with downside risks attached. We believe the private consumption and investment tendency will come under further pressure in the coming period, while public consumption will also be not as supportive as it was in the past few years. Under these circumstances, the net exports stand as the sole positive contributor to the growth in the coming quarters,” Ozlem Bayraktar Goksen of Tacirler Investment said in a research note.

“Annualized GDP down to $832.9 billion, lowest since 2011. Turkey's economy now risks falling behind Netherlands in terms of total GDP,” Fercan Yalinkilic of Bloomberg said on Twitter.

As of 2017, Turkey is the world’s 17th largest economy with a GDP of $849.5bn, followed by the Netherlands with a GDP of $826bn, according to IMF data.

Countries such as Brazil, South Africa and Turkey are all likely to slip down the rankings of the world’s largest economies by 2040 although Capital Economics has concluded that Turkey is likely to be the fastest-growing economy in Emerging Europe thanks to its growing population, the economic research company said on December 6 in its long-term global economic outlook report.