Turkey: GDP Surprises on the Downside

Turkey: GDP Surprises on the Downside

At 1.6% y/y, Q3 GDP growth was weaker than the expectations (2.6% y/y) and our forecast (3.2% y/y). On a seasonally adjusted basis GDP grew by 0.2% q/q in Q3, broadly in line with our expectation. The downward surprise in the headline growth number was mostly on the back of weaker-than-expected private investment and exports. The contribution of private sector investment was -2.2pp to growth. The expansion in exports slowed down to 11.9% y/y in Q3 from 20.9% y/y in Q2, still the contribution of foreign demand was 3.4pp. Consumption of households subtracted 0.4pp from growth whereas public sector spending contributed 0.8pp to growth. At the same time, Q1 GDP growth was revised to 3.4% from 3.3%, and Q2 GDP growth to 3% from 2.9%.

On the production side, the growth was broad based. At 0.8pp, the contribution of service sector to growth was the highest. On the other hand, the contribution of agriculture and industry was recorded both at 0.4pp. Industry grew by 1.7% y/y, mainly driven by the 1.3% y/y growth in manufacturing industry. Services sector expanded by 1.3% y/y, on the back of transport, storage and communication. Agriculture sector expanded by 2.9% y/y.

Industrial production index also surprised to the downside and contracted by 5.7% y/y in October mainly due to the working day and holiday effects. The decline in the IP was deeper compared to the market expectations of a fall of 2.5% y/y. On a seasonally adjusted basis, IP contracted by 2.6% m/m in October, following a 4.8% m/m increase in September and a 3.1% m/m decline in August. Due to the Ramadan and holiday effects, data regarding August-October period has fluctuated significantly, making the monthly data difficult to interpret. Nevertheless, we expect IP to enter into an increasing trend in November and onwards.

Despite the lower than expected GDP and IP reading, we maintain our year-end GDP forecast of 3% y/y with risks tilted slightly to the downside. We expect the economic activity to gain pace in Q4 as evidenced by the rise in credit growth and PMI readings above 50. Today’s data are unlikely to lead to a change in the policy stance of the CBRT. In its latest meeting with bank economists, the CBRT acknowledged that hard data regarding August, September and October were distorted due to the Ramadan and holiday effects and we would see fluctuations within this period. At the same time, the CBRT sees domestic demand recovering gradually starting from Q4. Therefore, the evolution of TRY remains key for the CBRT's next policy move.

Selim Çakır

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