Turkish Domestic Demand - The Main Culprit Behind Falling Growth?

The weakness in domestic demand turned out to be a major driver of contraction in 4Q GDP growth along with inventory drawdown, while the contribution of net exports remained largely positive. But having said that, recent momentum indicators on lending hint early signs of stabilization.

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Economic growth in the fourth quarter turned out to be -3.0%, slightly worse than our expectations of -2.7%, but in line with our call. 

The Turkish statistical agency, TurkStat, made some minor revisions to headline GDP for the previous quarters (1Q growth up to 7.4% from 7.2% and 3Q growth to 1.8% from 1.6%). The figures show further momentum loss with the summer volatility taking a toll on GDP.

In 2018, GDP growth came in at 2.6%, falling significantly from a year ago when it was at 7.4% - the highest since 2013, and below the government’s projection of 3.8%. In seasonal and calendar-adjusted terms, GDP contracted by a significant -2.4% QoQ vs -1.6% QoQ a quarter ago, confirming the economy has fallen into recession on the back of deterioration in confidence, sharply higher bank lending rates, and contraction in bank lending.

Quarterly growth (%, YoY)

Source: TurkStat, ING Bank

The breakdown shows private consumption turned negative for the first time since the global financial crisis with to -8.9% YoY in 4Q18, pulling growth down by -5.4 basis points, while investment growth that was in the negative territory in 3Q18 recorded another contraction at -12.9% YoY, contributing -3.8bp to the headline in the same period. Both construction and machinery & equipment investments were drags showing plunge in investment demand in the aftermath of last year's summer volatility.

Public consumption, determined by the spending pattern of the government that positively contributed to the growth performance remained so with a slight 0.5% YoY increase, lifting 4Q growth up by 0.1ppt, though it was considerably weaker given the efforts of policy makers to get a grip on the budget deficit.

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