Q4 2016 GDP Preview: Recovering but Subdued

Q4 2016 GDP data will be posted this Friday, probably mark a recovery from Q3 when a negative figure was recorded as the consensus estimates signal a 1.9% annual change in GDP, corresponding to 2.2% growth for FY 2016.

We believe that Q4 GDP growth is likely to exceed estimations as we see strong exports and government spending building a supportive case for the economic activity. That said, subdued growth will still be the overriding theme as pre-indicators suggest a weaker economy during Q1 2017.

Industrial production and capital good production indicators are in favor of a growth rate remaining at positive territory for the final quarter of 2016.

We also see export orders being constructive

As auto producers enjoyed a recovery in Europe, and the competition advantage that the currency depreciation brought which,

however, have had a negative impact on consumers.

Turkey Macro: 2Q16 GDP Growth Preview

Turkey’s growth has been remarkable resilient recently. While some of the biggest developing has entered recession, and some other has just muddled along, Turkey has managed to sustain economic growth along with its Asia peers amid rising concerns around emerging markets.

Turkey, despite some setbacks, grew 4.8% y/y in 1Q 2016, beating our estimates by 40 basis points. The economy was faster largely due to private consumption and lacked the contribution from private investment, which, however, could have been a sign of strength for the economy in the upcoming quarters. That said, domestic demand coming out stronger than expected could be attributed to the minimum wage hike and Syrian migrants’ consumption.

Regarding the growth Turkey had a second quarter will full of ups and downs as evidenced by macro data (see the charts below) which, in our view, did not provide much cause for comfort. Particularly, the economy seemed to be strong during May while it posted weaker reading for April and May. We believe that 2Q was another round of weak private investments but this likely to be offset by other components of the growth to some extent. We estimate that Turkey will post a 3.4% y/y real GDP growth in 2Q report which is scheduled to be announced on September 9, 2016.

Turkey - Industrial Production - June 2016

Turkey - Capacity Utilization - June 2016

Turkey - Real Sector Confidence - June 2016

Turkey - Consumer Confidence Retail Sales - June 2016

For the remainder of this year, we expect Turkey’s growth continue to decelerate but is very likely to outperform its EMEA peers. On a separate positive note, the domestic political environment has recently been more stable in the aftermath of failed coup attempt. Also, there are some positive signs of greater social cohesion between different segments of society which may re-build confidence. This would pose upside risks to growth trajectory.

Consumer Confidence Tumbles

Despite the ongoing still-decent GDP growth, the economic outlook of Turkey is not in brilliant shape. Following a robust start to 2015 for the economy, the current focus of consumers in view of economics developments in predominantly on general domestic conditions and clearly there are negative signs in these areas.

The mood of consumers in Turkey is more pessimistic according to the data released by Turkish central bank in September’s Survey of Consumer Confidence. The overall indicator providing the numerical information about the consumers’ expectations was down by 3.9 points to 58.5 which was the lowest figure recorded since January 2009. Moreover, Turkey posted a reading below 60 only three times in the past (between November 2008 and January 2009), in other words consumer confidence is not that far from hitting its all-time low.

The economic expectations index also hit an all-time low in September at 72.0. The index averagely fell by 8% in the past two months.

Turkey - Consumer Confidence Chart

Given the higher political risks ahead of the elections, further potential lira weakness, and the restart of violence in the southeastern part of the country, one would not expect the mood of consumer to be boosted after all.

Turkey - Propensity to Save and Bond Yields

We find something very interesting in the chart above as it provides information about the relationship between propensity to save and Turkey benchmark bond (2-year) yield. Apparently, the index had worked out greatly as a pre-indicator for rates in the debt market until early this years, however the two series clearly have moved different way since then. Ultimately, average Turkish citizen is likely to face important challenges in a struggling economy before they return to non-crisis consumption patterns.