Q2 GDP: Don’t get a speeding ticket

Turkish Economy: Q2 GDP

Don’t get a speeding ticket

Gross domestic product increased by 2,1% QoQ (seasonally and working day adjusted) better than the market expectation of 1,8%. In YoY terms growth rate has decelerated to 5,1% from 5,2% recorded in Q1 – slightly lower compared to market expectations of 5,3%. Private consumption and investments were the main drivers with 1,3% and 2,2% contributions while stocks added another 0,7%. On the other hand net exports and public spending slashed off -1,6% and -0,5%, respectively (in QoQ terms, cover figure).

Key Take-aways:

  • Strong economic activity to further accelerate in third quarter on the back of tourism revenues and agricultural harvest.
  • 2017 GDP expectation revised up to 6%.
  • Despite sizeable gold imports in second quarter external balance holds-up pretty well supporting our argument that the relationship between growth and current account deficit has weakened in recent years.
  • Fourth quarter and afterwards will be more challenging on the back of fast-paced Euro appreciation and higher industrial metal prices.
  • Private investments kicking-in may provide lift for 5+% GDP growth next year.

Construction & Investments

Turkish economic performance runs a high correlation in regard to construction activity. An early indicator for construction can be found in non-metal mineral processing. In the second quarter non-metal mineral processing has accelerated by 2,5% QoQ. Consequently construction activity has accelerated by 1,6% QoQ in the second quarter (Figure 1).

Investments provided main impetus with a 9,5%YoY increase. Although investments mainly stemmed from construction we have tracked that capital goods production increased by 24% YoY in the second quarter (Figure 2). Capacity utilization running at 77,8% trend-wise also supports investments.

Private & Public Consumption

Household demand continued in vivid fashion in second quarter. Strong fiscal stimulus by the government allowed unemployment rate to fall to 10,2%. Meanwhile credit growth posted a strong performance. Accordingly domestically produced car sales and household appliance sales increased by 9,9% YoY and 21,2%, respectively (Figure 3).

Despite expansionary fiscal policies public spending has actually shrank by 3,9% QoQ. The fact that public policy in Turkey usually being managed by the revenue side such as tax deferrals or tax incentives rather than higher expenditures limited the contribution and reflects budget discipline (Figure 4).

Outlook

Gold imports have dented the trade balance in the second quarter. Although net export contribution still stays in positive territory in YoY terms it actually turned negative in quarterly terms. This trend supports our argument that the relationship between economic growth and current account has been weakened. Barring gold imports net exports should provide positive contribution due to strong demand in Europe and increasing world trade volumes.

July IP figures with a 2,3% MoM increase suggests that third quarter may turn out to be another fast quarter. In second quarter statistics we have seen that agri output has increased by 1,4% QoQ in line with seasonal dynamics. Third quarter should deem better in terms of agri contribution.

On top of agricultural harvest ongoing tourism recovery will also support growth in the third quarter. Due to base effect we will see a very high YoY increase when the stats will come out in three months of time.

Following today’s released we are revising our 2017 growth up to 6% based on growth arithmetic.

Two hurdles regarding future GDP growth are weather;

1. Stronger Euro will dent private consumption through purchasing power effect, and

2. Higher industrial metal prices will dent profit margins in the real sector.

The upside will be investments catching up that may generate significant lift to GDP growth next year.