Q4 2015 GDP: Robust but Vulnerable

At 4 percent, Turkey GDP’s growth rate remained robust despite a challenging year, primarily driven by strong private and public consumption, and higher gross fixed capital formation in the public sector. In 4Q 2015, the economy expanded by 5.7% y/y comparing favorably with consensus of 5%. That said, adjusted for seasonality and working-day effects, economic activity grew by 0.7% y/y, and note that there were more working days in Q4 2015 compared with Q4 2014.

The expenditure breakdown of the data showed that the main driver of the pick-up in headline GDP growth in 4Q was consumption which generated 3.8% of the total 5.7% GDP growth. The public expenditures and investments were also positive while the economy saw negative impact from net exports. Yet some problematic details clearly remained in 2015 as the fastest growing components were purchases of goods and services by the government (9.7%) and the fixed capital formation by the public sector in construction sector (8.4%). Since the government appeared to be the engine of the economic expansion, not much room is left for the argument that Turkey performed astonishingly in a multi-election year. Furthermore, the both components discussed above posted significantly declines in the final quarter, proving that pork barrel spending implied to help secure reelection (for purchases of goods and services 3.4% in 4Q versus 11.4% in 9M and for investments in construction by the public sector 1.7% in 4Q versus 10.4% in 9M).

The sectoral breakdown of the economy is given below.

Turkey - Sectoral Composition of GDP

On a positive note, manufacturing sector’s contribution to GDP increased by 30 basis points in 4Q 2015 y/y, however, failed to make a positive impact for the full year. Interestingly, 13.8% of the total output generated in 2015 came from financial services, making the industry the fastest-growing segment of the economy. Agriculture had been strong for the 9M 2015 period, but showed weakness in the final quarter.

We believe it is needed to highlights the ongoing trend in the adjusted GDP to reveal underlying drivers behind the economy. The following table is given to this end.

Turkey - Changes in Components of GDP

The most troubling data point was slowing consumer spending that recorded only 0.3% Q/Q growth. The contribution of net exports to the economy was at stake. Turkey will be in need for a recovery in Europe in order to keep its net exports adding value to its economy.  Again, the government clearly has been the “strongest” foundation of the economy in the past four years.

Turkey - Private Sector Investment Expenditures

The critics of Turkey’s economic growth in the recent years argue that it lacks rising fixed investment spending, citing the current business standards negatively influencing the investment decision primarily due to deteriorating judiciary situation. The chart above shows the private sector investment expenditures has remained below its 2Q 2011 for the past 18 consecutive quarters. Thus, double-digit unemployment figures are here to say for another while.

Turkey - Real versus Potential Output

According to our estimates*, Turkey’s real GDP in 4Q 2015 outstripped the potential output which may lead further inflation pressures going forward. We wonder, then, if the monetary policy committee used this as an input before deciding to engineer the interest rates at lower level in a surprise move last week.

Consensus expectations for 2016E growth is at 3.6%. We believe downgrades for this year’s economic growth are very likely as well as we project Turkish economy expanding at pace of 3.4% in 1Q 2016.

*The potential output is estimated with Hodrick-Prescott filter. Despite the fact that 1600 is frequently used for quarterly data as a value for λ for quarterly data, Turkish central bank economists suggest that the optimum value for λ for Turkish economy studies is well below 1600.