Q2 Recap: Economy Regaining Momentum


Turkish economy has appeared to be regaining momentum and followed the path of recovery after a dismal record in the second half of last year. After 1Q17 when Turkey posted a growth rate that exceeded expectations, economic indicator overall suggested the continuation of the economic upswing and we now estimate that Turkey will post another 5% growth rate for second quarter.

Before leading in, we see it fit to add some comments about Turkey’s GDP revision. We believe that the harsh criticism over the reliance of the this new methodology on current prices is justified, as well as huge back dated revisions make rationalizing the data even harder. To date we have seen some examples of some poor countries turning into middle class ones overnight (Ghana in 2013, Nigeria 2014). Being skeptical of accuracy of economic data in developing economies is likely to be a rising phenomenon across the board where not just the future but also the past starts to become uncertain.

Turning back to the subject at hand, yesterday’s industrial production data suggested an average increase of 1.2% in the 3-month period ended in May, but more importantly, capital goods, that performed a 3.6% growth in the same regard gave us the color we needed to draw a rosy picture. The overall trend in both indicators showed an uptick that could be a sign of a better shape in the economy in months to come.

On another positive note, we still see export to be contribution to output growth in Turkey as our bullish scenario for auto production (exports) is still intact due to depreciated lira and the recovery in Europe.

After such optimistic comments, this is where we should note that there are plenty of reasons to feel unsettled about this economic growth since we see the government sponsored lending growth as the main driver of it. Turkey’s banks experienced one of the fastest lending booms in country’s financial history in February-April period. While this increases chance of major asset quality deterioration in case of an economic downturn, it sets the bar high for growth due to the base effect. Turkey may find itself in a scuzzy situation after this impermanent business cycle.