Q1 GDP:''Going through the roof.''

Turkish Economy: Q1 GDP

Going through the roof.

Gross domestic product increased by 1,4% QoQ (seasonally and working day adjusted). In YoY terms growth rate has accelerated to 5% markedly better compared to market expectations of 3,5%. Net exports and government expenditures were the main drivers with 1,9% and 0,4% contributions while private consumption, investments, and stocks slashed off -0,4%, -0,4%, and -0,1%, respectively (in QoQ terms, cover figure).

Key Take-aways:

  • Healthy growth composition supporting financial stability with positive net exports in consecutive quarters.
  • Private consumption to speed up again in summer with better tourism prospects.
  • Investments lagged again – as expected due to political noise, with stability in the wake of referendum businesses may start implementing their cap-ex plans.
  • Industrial production for the month of April provided cushion against Ramadan related effects, in second quarter we expect the recovery to become broad-based, growth rate remaining at high levels.
  • We revise our annual GDP growth expectation to 4,5% to 5% range, still risks are tilted to the upside.

Net Exports

Germany grew by 0,6% QoQ in Q1, better than expectations and Euro Area growth rate was revised upwards (0,5% à 0,6%). Higher employment, loose financial conditions, and low gas prices increased car demand in Europe. That in turn benefited Turkish automotive industry favorably. Automotive exports rose by 26,5% and Turkey’s total exports rose by 9,7% YoY (Figure 1).

On the other hand sharp depreciation of Turkish Lira curbed imports (Figure 2). Combined with tax measures targeting foreign made motor vehicles consumers switched to domestic products decreasing imports by 1,3% QoQ keeping net exports in positive territory.

Private Consumption

Household demand was kept alive by the strong fiscal stimulus of the government. It slightly slowed down to 3,2% YoY from 3,5% recorded in previous quarter. Government expenditures rose by 9,4% YoY. Tax allowance for certain domestic appliances boosted both sales and production. Sales increased by 36% in Q1 while as durable goods production rose by another 7%.

Normally car sales constitute a good proxy regarding household demand. However due to new tax code on the automobile market consumers shifted towards domestic manufacturers shrinking total market size. Some even preferred purchasing for domestic appliances rather than automobiles (Figure 3).

Better budget multiplier performance seems in line with the theory. Having applied the stimulus during low-cycle economy management capitalized on this dynamic. E.g. Trump has much less chance to further stimulate since US economy considered to have entered late-cycle.

On the back of budget discipline government expenditures should slow-down going forward further strengthening the growth composition.

Investments

Capacity utilization can be considered as the «necessary» condition for investments. In Turkish economy capacity utilization (78,8%, Figure 4) hovers at its highest level since GFC.

However confidence deems to be the «sufficient» condition. In the wake of the referendum consumer confidence has increased by 7,4%. We expect a similar trend in business confidence indices to appear. A 24,7% increase in capital goods production for the month of April can be considered as a proxy (Figure 5).

Investments can be another source of growth replacing government expenditures down the road.

Outlook

Tourism will play a key role in the third quarter. Besides, we expect this year to be an «on» year in agriculture. So far tourism statistics point to a revival. Russian tourists and visitors from neighboring countries i.e. Iraq, Iran, and Georgia may compensate for the relatively lower European tourism demand. Summer month statistics play a crucial role and we have seen back-to-back increases in aviation statistics in the months of April and May. International flights to and from Antalya have risen by 31,4 and 57,4%, respectively.

Tourism will play a key role in the third quarter. Besides, we expect this year to be an «on» year in agriculture. So far tourism statistics point to a revival. Russian tourists and visitors from neighboring countries i.e. Iraq, Iran, and Georgia may compensate for the relatively lower European tourism demand. Summer month statistics play a crucial role and we have seen back-to-back increases in aviation statistics in the months of April and May. International flights to and from Antalya have risen by 31,4 and 57,4%, respectively.

Turkish growth momentum can last till first quarter of next year. At that time with inflation at single digits central bank policies may kick in to support the trend-growth rate to accelerate further above 5%.