Turkey: Recession prior to the local authority elections, outlook remains muted

It’s now official: The Turkish economy crashed into recession at year-end 2018. Economic output fell palpably in the final quarter, down 2.4% on the prior quarter. Accordingly, gross domestic product (GDP) decreased for the second time in a row. The decline was also more pronounced than in the summer quarter in which the fall was 1.6%. Since the economy was still dynamic at the beginning of 2018, the growth rate for the year as a whole was positive at 2.6%.

The poor economic figures pose a problem for President Erdoğan with local elections in Turkey at the end of March. The government has already introduced various measures in efforts to combat the high inflation figures, to keep the economy ticking over, and ultimately to placate the population. These have included raising the minimum wage, cheaper government distribution of basic foods as well as an extension to the reduced rate of VAT, amongst other things, on cars. In February 2019, the rate of inflation was just short of 20% and therefore still formidable. It is unlikely to fall back considerably until summer when baseline effects will bring it down, though it will nonetheless remain in double digits.

The negative impact of the currency crisis that led to immense price pressure in summer 2018 are becoming ever more apparent. Inflation-related losses in purchasing power and increasing unemployment have shattered consumer confidence and have led to a considerable fall in private consumer spending. Companies, which have often taken loans denominated in foreign currencies, are also suffering from the weak lira and impaired domestic demand. They have scaled back their investments notably. Only the improved foreign trade balance has recently been able to cushion the impact of the recession crisis on Turkish GDP thanks to the massive fall in imports.

For these reasons, an economic turnaround will not take place until the second half of 2019 at the earliest, once consumer sentiment gradually recovers. In the current year, Turkish economic output will probably hardly do more than stagnate and is not set to grow again until 2020.

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