Turkey’s real GDP grew by 3.1% y/y in Q2, below the market consensus of 3.7% and our estimation of 3.4%. Of that growth number, 3.4% and 1.7% came from household and public consumption, respectively, which were partly offset by weak foreign demand that a negative impact of 2.2 pps on growth. Aside from being lower than expectations, the GDP report has some worrisome points including a public demand taking on a progressively larger role in driving economy.
In seasonally adjusted terms, output rose by 0.3% q/q, down from 0.7% in Q1, its worst reading in two years. Household consumption contracted by 0.5%, whereas investment expenditures and government spending posted positive growth figures of 5.4% and 3.8%, respectively.
Another worrisome point is the composition of investment expenditures which has been increasingly reliant on construction. To be more precise, in real gross capital formation for both private and public, construction expenditures grew by 6.9% and 6.8% y/y while machinery & equipment investments declined by 5.2% and 5.8% y/y, respectively. Considering the characteristic of an emerging market, one would realize how huge risks are posed when construction is boosted in that way.
Below we conduct two analyses in order to show changes in Turkey’s GDP composition from a sectoral point of view. Clearly, financial services have been the winner in the recent economic environment as agriculture seemed to be set for losing ground. Meanwhile, manufacturing still lags behind in output growth.
Going forward, the government and the central bank will be under increasing pressure to support economic activity as growth slowed down sharply than expected. We believe that the current pace of the decline in average cost of funding which has circa 15 bps per month in the recent months, will not be enough to stop the slowdown, therefore pressure on fiscal policies are very likely to rise. Concerns around policy responses to this pressure are, in our view, justified at this stage.
Note that Q2 data predates the July 15 coup attempt which caused a serious confidence loss as evidenced by 7% y/y decline in industrial production. We expect downtrend economic activity to be more pronounced in 3Q.
Good News or Bad News
Labor market data for February 2016 was released early this week. The unemployment rate was down 20 basis points on monthly basis to 10.9% according to the official figures. The employment rate also saw a pick-up and stood at 45.3% while workforce participation rate was 10 basis points higher at 45.3% compared to January. In non-adjusted terms, Turkish economy added 181K jobs of which 117K was in non-farm industries. However, manufacturing jobs decreased by 24K in the month while it was more than offset by the strong performance in services.
We see its fit to analyze the adjusted data when it comes to study the dynamics of Turkish labor market and its relationship with the overall economy. According to the report, Turkey added 50K jobs in non-farm industries, and again 24K job lost in manufacturing was compensated by 55K new hires in services. The unemployment rate fortunately dropped to a single-digit level at 9.9% with non-farm and youth unemployment rates at 11.9% and 17.4%, respectively.
A while ago we mentioned that Turkey lacked the ability to create jobs despite recording positive growth. Not surprisingly, the policy makers came under fire against this backdrop. February saw the first single-digit unemployment rate since May 2014 when calendar effects excluded, could be signaling a new era for Turkish labor market but first we need to see to continuation of the recent trend.
But it is not all rosy and here is the bad point we gleamed from the labor market. Manufacturing job which are normally the main source of a healthy economy, continue to plunge. For the fourth consecutive month, the industry lost 20 basis points share in total unemployment as only 24.3% of the total workforce was employed in manufacturing, down from 25.1% in October 2015. This is critically important for any economy since non-manufacturing jobs are considered as less paying jobs, that is to stay, increasing manufacturing job is developing economies’ gateway to being a high income society.
On the economic expansion front, 171K non-farm jobs created in only two months was clear sign of solid performance in Q1 2016. We recently studied the relationship between the new hires in non-farm industries and the GDP growth, and found that the number of 185K (or 65K monthly) could function as a threshold to assess the overall economy. Yet, Turkey’s strong economic performance is evidenced by the newly added payrolls in the first quarter. With broad strokes, this is in line with our positive views about economy.
Considering that Turkey watchers have been concerned about credit metrics in Turkish financial system, we need to put some emphasis on the impact of unemployment on asset quality in consumer loans. Anecdotally, Turkish banks do not receive a major deterioration unless the rate of jobless people remain above 12%. Thus, we are of the opinion that the current developments in the labor market will not have negative consequences for lenders.
The day before I posted this article Turkey’s Finance Minister Mehmet Simsek had been complaining that state is growing in Turkey by giving the number of people employed in public utilities. Surprisingly he had been criticizing employment policies, and consequently the government while changes in the Cabinet is on the agenda. But then we saw tweeting about ongoing street clashes in Ferguson indicating that things got back to normal (#DirenFerguson).
One should ask which industries have created most jobs in Turkey recently. Surely and evidenced by the comments of a Cabinet member, the state has been one of the top employers in Turkey providing itself a sustainable power which is also a policy mostly run by less developed countries. Monthly job creation by industries data compiled by the Central Bank of Turkey shows significant trends in Turkey’s labor market between Jan 2009 and Jan 2014. Materialized, the chart below indicates contribution of each industry to new jobs.
Firstly, despite the remarkable growth in the market, poor employment performance in mining industry shows why Erdogan compared the Soma disaster to mining accidents in 19th century Britain and nonchalantly observed that accidents are “what happens in coal mining”.
As expected, the role the construction played in creating jobs is absolutely nonignorable. Concerns around prosperity bubble are rising in Turkey which would ultimately lead the labor market to collapse. Since Jan 2009, the employment in construction has grown by 65% adding 655k new jobs.
More than 20% of the workforce is employed in agriculture in Turkey proving the country has a lot of challenges to face to be able to reach its high-tech export targets. Relatively, South Korea only employs 7% of its workforce in agriculture according to the World Bank data.
Finally, and most importantly, Turkey’s civil service is continuing its steady expansion making the Turkish public sector’s weight on the country’s economy is quite considerable when compared to other nations. According to Mehmet Simsek, Turkish public sector accounts for 3.37 million people as of the end of June. Tragically securing a government job in Turkey is not an easy task thanks to the high level of politicization.