* Part I here
* Part III
* Part IV
* Part V

Our Outlook Turkey 2019 report reflected: “Turkey’s dream of becoming a trillion-dollar economy has gone up in smoke—at least for the foreseeable future… the severe currency crisis sparked spreading economic turmoil and appears to have delivered a mean recession. President Recep Tayyip Erdogan and his Justice and Development Party (AKP) will step up campaigning for the upcoming March 31 local elections attempting to avoid sheepish acknowledgement that the growth party is over. The International Monetary Fund (IMF) expects Turkey’s nominal GDP to come in at $631bn for 2019. That would mean the country retaining its position as having the world’s 17th largest economy, but the anticipated output figure pales in comparison to 2017’s $849.5bn…

“The government, meanwhile, has been encouraging local lenders to ‘voluntarily’ cut lending rates and private businesses to slash prices under the government’s ‘All-Out War on Inflation Programme’ amid the high policy rates brought in to fight double-digit inflation…

“Turkey’s problems… are very real and investors will want to see no let-up in ministers grappling with them in earnest. The fear is that despite the country’s dynamic legions of SME business people, blessed with a market buoyed by a relatively young population, there will be no V-shaped recovery this time around, with something like an L-shape looking all too possible and unemployment going through the roof…

“In early December [2018], Refet Gurkaynak, a professor of economics at Bilkent University in Ankara, warned: ‘This time [coming out of an economic reversal] we’ll grow below potential.’ Predicting that Turkey’s unemployment rate of 11.1% was set to soar, he added: ‘What we have seen in previous years was a push to boost demand in order to achieve growth above the economy’s potential. Now we are paying the price of that decision.’"

Main Macro Indicators	2013	2014	2015	2016	2017	2018	Q1	Q2	Q3	Q4
GDP Growth (y/y)	8.5	5.2	6.1	3.2	7.5	2.8	-2.3	-1.6	0.9	-
GDP (per capita, $)	12,395	12,022	10,915	10,817	10,537	9,346	-	-	-	-
GDP (current prices, TRYbn)	1,810	2,044	2,339	2,609	3,111	3,724	922	1,024	1,145	-
GDP (current prices, $bn)	950	934	859	863	852	766	172	175	202	-
CPI (%, eop) (latest: Nov)	7.4	8.2	8.8	8.5	11.9	20.3	19.7	15.7	9.3	10.6
Population (mn)	76.7	77.7	78.7	79.8	80.8	82.0	-	-	-	-
Unemployment (%, eop, Aug)	9.0	9.9	10.3	10.9	10.9	11.0	14.1	13.0	14.0	-
CA Balance ($bn)	-63.6	-43.6	-32.1	-33.1	-47.3	-27.0	-1.66	-1.07	6.42	-
Budget Balance (TRYbn, Oct)	-18.5	-22.7	-23.5	-29.9	-47.8	-72.6	-36.16	-42.4	-7.2	-14.9
source: imf, tuik, treasury, central bank

Expectations for official data outcomes were continually thrown off-track during late 2018 and throughout 2019 after national statistical institute TUIK came under a new management approach. For instance, there were periods when Turks said the fact that the country had sunk into recession was as plain as the nose on your face, yet the official statisticians were none-too-reliable when it came to defining its start-point and end-point.

By now, Turkey’s official data series are widely regarded as a bad joke, but mainstream analysis, along with planning and pricing, nevertheless remain tethered to the TUIK figures.

The connections between growth and initial indicators such as industrial production and retail sales have been lost. It is a move past the 50-level that is supposed to indicate a recovery in the manufacturing purchasing managers’ index (PMI) data but PMI compiler IHS Markit has bowed to the Turkish distortions. In its charts, a score of 45 is now enough for the TUIK to signal a recovery in the industrial production data, even though there is no connection between industrial production and manufacturing output in the GDP figures and the monthly industrial production data releases.

Comfort zones

Analysts and journalists covering the economy generally do not like straying from their comfort zones, thus they continue to process the official data, even when it seems warped. And Erdogan and son-in-law finance minister Berat Albayrak make their work even easier by essentially releasing headline data earlier than the official publication dates with so-called forecasts that are uncannily accurate, at least as regards the official picture.

It is pretty much certain that the 2019 official growth rate will be posted as slightly above zero, suggesting that the Turkish government will have managed to avoid what it defines as a recession in the face of the global market “conspirators” it, with a nationalist-populist bent, claims are behind Turkey’s economic difficulties. The unveiling of an official growth achievement of 4-5% for Q4 2019 seems to be ahead. And, if the Erdogan show remains in place, expect 5% in 2020 in line with the president’s aspirations, despite analysts currently suggesting around 3% looks more realistic.

If Erdogan is overthrown in early elections, all bets are off.

The official data suggests Turkey had a $789bn economy in 2018, although due to some controversies in the exchange rate approach taken by the TUIK, there is a clash with the $771bn forecast by the IMF.

For 2019 and 2020, the IMF and the government are in agreement, with $740bn pencilled in for 2019 and $812bn-813bn for 2020.

Even the official figures suggest that investment has fallen sharply, hurting hopes for sustainable growth. The construction industry remains in serious trouble with unpayable debts from the easy money era in which it drove the economy.

Erdogan has not headed to the IMF but he has chosen to scrap fundaments of the free market to control the exchange rate, interest rates, and food prices among other things, while the TUIK’s statistical acrobatics serve his cause.

Looking at Erdogan’s opening of the credit taps, there is actually no financial source to support the latest cycle of loan stimuli but the central bank is on the case, using easing via a complicated monetary policy that makes it hard to follow how much lira it is pumping into the economy.

Yet such is the wretchedness out there that private lenders are still dragging their feet over extending new loans and domestic confidence in the government remains pretty much at rock bottom. Frothy state banks, meanwhile, risk exceeding the 20% loan growth threshold set by the central bank to trigger more favourable reserve requirements.

Crazy or crazy wow?

Of late, Erdogan has been reviving big pronouncements on the glories that will be achieved by him with his mega Istanbul Canal project. Before the June 2011 general election he referred to it as his “crazy project”. He meant “crazy wow” but the consensus is that just “crazy” will do. How serious he is about implementing the $12bn plans is open to question, but the investment—which many observers see as pretty much pointless in its practical effect on shipping but a big negative environmentally speaking—is emerging as a clash-point between Erdogan and Istanbul mayor Ekrem Imamoglu, the opposition politician who humiliated the president with his victories in the business capital’s March local election and June revote and could become his main opponent in the next presidential election. Imamoglu presents the canal project as treasonous to Istanbul.

Despite all the data manipulations, the official number of unemployed people in Turkey has broken consecutive records. Some 4.65mn people were officially unemployed as of August in the middle of the summer season when employment in such sectors as tourism, agriculture and construction peaks.

In addition to the 4.65mn, there were 2.25mn people ready to work but who were listed as not having actively sought a job in the previous few weeks. A total of 613,000 of them said they had lost any hope of finding employment.

The official number of people who had remained unemployed for longer than one-year was registered at another historical record. There was officially 1.13mn such jobless people as of August. Suicides attributed to economic despair are not at all uncommon.

Previous synthetic loan growth cycles did not increase employment, but ended up producing FX deposits or drawing in imports.

Erdogan has spent almost a trillion lira on triggering growth in lending, covering the budget deficit and borrowing, among other items, since the failed coup in 2016. But Turkey remains in dire straits, to put it mildly. On December 27, the politely spoken International Monetary Fund did its best to raise some alarms by stating that Turkey’s monetary policy easing—which from July to December halved the benchmark interest rate to 12%—had  “gone too far”. It called on Ankara to ensure that fiscal policy remained a main policy anchor.

 “While the recent fiscal stimulus has helped the economy recover, the underlying deficit has increased significantly. Directors recommended a broadly neutral fiscal stance in 2020,” the IMF said in an executive board assessment.

People still need convincing that some kind of real recovery is at hand and ready for anchoring after they get through the winter. The populist line that accelerated economic growth ahead is set to raise all boats just doesn’t wash. Folk have heard it all before. An increasing number of people fear they will soon number among the huge number of people left behind in polarised Turkey.

Turkey - GDP breakdown (%)	2016	2017	2018	Q1/18	Q2	Q3	Q4	Q1/19	Q2	Q3
GDP Growth (y/y)	3.2	7.5	2.8	7.4	5.6	2.3	-2.8	-2.3	-1.6	0.9
By Production -Agriculture	-2.6	4.9	1.9	8.1	-0.9	2.4	0.3	2.7	4.2	3.8
Industry	4.2	9.2	1.3	7.7	4.5	1.1	-6.7	-3.9	-2.6	1.6
Construction	5.4	9.0	-2.1	6.8	1.5	-6.3	-7.8	-9.2	-12.4	-7.8
Services	0.2	11.1	5.4	10.5	9.0	4.6	-1.0	-3.4	-0.1	0.6
By Expenditure - Private Consumption	3.7	6.2	0.0	6.0	2.7	0.7	-7.7	-4.9	-1.0	1.5
Government Consumption	9.5	5.0	6.6	4.9	9.5	6.9	5.3	6.6	3.4	7.0
Gross Fixed Capital Formation	2.2	8.2	-0.6	10.4	6.1	-4.4	-11.6	-12.1	-22.4	-12.6
Exports	-1.9	12.0	7.8	0.9	4.5	14.3	10.7	8.9	8.1	5.1
Imports (-)	3.7	10.3	-7.8	15.3	0.2	-16.3	-24.3	-29.4	-17.0	7.6
Current Prices (TRYbn)
GDP	2,609	3,111	3,724	790	890	1,027	1,017	922	1,024	1,145
By Production -Agriculture	7%	6%	6%	3%	4%	10%	6%	3%	5%	12%
Industry	22%	21%	22%	22%	22%	21%	24%	24%	23%	21%
Construction	10%	9%	7%	8%	8%	6%	6%	6%	5%	5%
Services	24%	22%	23%	23%	23%	24%	24%	23%	24%	24%
By Expenditure - Private Consumption	60%	59%	57%	58%	57%	55%	57%	56%	58%	57%
Government Consumption	15%	15%	15%	15%	15%	13%	17%	17%	16%	14%
Gross Fixed Capital Formation	29%	30%	30%	31%	33%	28%	29%	28%	26%	24%
Exports	22%	25%	30%	25%	27%	33%	32%	32%	33%	32%
Imports (-)	25%	29%	31%	32%	32%	30%	29%	31%	32%	28%
source: tuik