Turkey’s recession deepens ahead of local elections

EPA-EFE/SEDAT SUNA

A woman makes traditional bread at a Turkish restaurant while a board of currency exchange office is reflected on the window in Istiklal Street in Istanbul.

Turkey’s recession deepens ahead of local elections


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Turkish growth is decelerating as the value of the national currency, the lira, continues to plummet and inflationary pressure eats into the living standards of the country’s citizens only months before municipal elections are to held across the country in March of next year.

Economic Context

The economy is in technical recession given two consecutive quarters of contraction, a fact that could become deeply problematic for the ruling AKP party, the nationalist-Islamist led by the country’s president, Recep Tayyip Erdogan, which has dominated all aspects of Turkey’s political life for the better part of 16 years.

According to data released on by the Turkish Statistical Institute (TUIK), the Turkish economy grew by only 1.6% in the third quarter, far below the 5.2% registered in the second quarter of the year, or the 7.2% seen from January to March.

The latest numbers are potentially catastrophic for Turkey’s emerging economy, which needs 5%-to-6% growth to maintain the level of job creation required to sustain a healthy economic outlook. At the same time that the economy has contracted, unemployment has skyrocketed to 11.7% of the eligible workforce and, while job creation is losing momentum.

Credit Agency Moody’s is predicting only 1.5% growth for the Turkish economy for the whole of 2018, with an even higher 2% contraction for 2019.

Things could get a lot worse before they get any better. According to data released on December 17, the forecast for the immediate future does not bode well for Turkey with industrial production plummeting by 5.7% in October alone. Those numbers provided further evidence of a continuing downward trend for the Turkish economy, which had already dropped by 2.7% in September.

Investment into Turkey has dropped by a whopping 3.6%, while €16.27 billion has left the country while the capital inflow totalled €11.87 billion in the first quarter.

Renewed pressure is mounting again on the lira once again, fueling inflation amid declining domestic demand. Turkey’s year-on-year GDP measured in euros has dropped by €42.91 billion, with GDP per capita falling to €249, which is actually lower once he four million Syrian immigrants to the population are added into the overall calculations.

Political pressure is mounting

At this point, the only positive number coming out of the Turkish economy is a current account surplus of €1.23 billion in the third quarter, compared to a €13.19 billion deficit in the first quarter. However, for an economy plagued by current account deficits for years, this is an unmistakable indicator of rapidly falling living standards.

Interest rate rises over this past this summer supported the value of the lira after it began to freefall against all major reserve currencies. Compounding the problem was Erdogan’s autocratic style of rule in which he rejected the advice of most economic experts by remaining in favour of lower interest rates to continue driving growth, a policy that he was warned against after inflation hit 16% in July.

Erdogan, who routinely clashed with his central bank governors over monetary policy, continued to prioritise growth and lower rates which prolonged and deepened the currency crisis, which could have been alleviated if he had allowed the central bank to hike interest rates in order to give the economy a chance to rebalance.

Turkey’s currency reserves are notably low compared to its €159.18 billion in short-term debt is denominated in currencies other than the lira. Furthermore, much of the foreign currency in Turkey is held by banks

The current slump has been particularly acute in the construction sector, a major industry for the Turks, which shrank by 5.3% in the third quarter, while durable goods consumption dropped by a shocking 24%. This combination of declining demand and rising prices, known as “slumpinflation”, is a politically toxic phenomenon.

Food, cement, ceramics, and electrical equipment show significant deceleration and accompanied by lower inflation, which dropped by 1.4% in November but continues to hover at over 20%, mainly due to the weakness of the lira.

With the economic indicators looking increasingly grim for the authorities, Erdogan and the AKP may have a tall order on their hands if they want to retain control of Turkey’s economic and political centres –  Istanbul and Ankara.

 

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