Turkey is in a recession, says Capital Economics

A
boy jumps into Bosphorus to cool off in Istanbul, Turkey August
20, 2018.
Reuters/Murad
Sezer

• Turkey’s economy has most likely dived into a “steep”
  recession after the lira’s recent plunge, according to Capital
  Economics’ Jason Tuvey.
• The Turkish economy was in a weak state even prior to
  the most recent collapse in the currency, he added.
• Tuvey expects the Turkish economy to contract as much
  as 4% year-on-year in the final quarter of 2018.
• “Overall, there’s no getting away from the fact that
  the Turkish economy is experiencing a deep
  downturn.” 

Turkey’s ailing economy has most likely plunged into a recession
over the last month thanks to
the rising crisis with the nation’s currency, and a fragile
banking sector, according to new research from Capital Economics.

On Wednesday, Jason Tuvey, a senior emerging markets economist at
the research house told clients in a note titled “Turkey entering
a steep recession” that data coming out of the country is
indicating pretty clearly that a recession has arrived, and that
it will be officially confirmed by the end of the year.

“The latest Turkish activity data suggest that the plunge in the
lira since May, and the associated sharp tightening of financial
conditions, has tipped the economy into recession,” he wrote.

While the lira has been falling since May, issues in Turkey first
came to mainstream attention when the lira’s slump intensified
after the Trump administration placed
a series of sanctions against Turkey in
retaliation for its refusal to release Andrew Brunson.

Brunson is an American pastor detained by Turkish
authorities for his alleged support for the outlawed Kurdistan
Workers Party and the Gulenist movement, both of which are
accused of being involved in 2016’s failed coup against President
Erdogan.

A falling currency tends to mean rising inflation as the
cost of imports increase, and that is just what has happened in
Turkey. Even prior to the lira’s second collapse after US
sanctions, inflation had already hit a 15-year high in July —
close to 16%.

“The latest signs show that higher inflation, coupled with a
severe tightening of financial conditions, is filtering through
into an abrupt slowdown in economic growth,” Tuvey wrote.

“Hard activity data paint a grim picture of the economy even
before the lira’s leg down this month,” he continued, pointing to
industrial production data from the second quarter, which show a
contraction of 0.7% compared to 1.8% growth in the first quarter,
as the chart below illustrates:

Capital Economics

Added to slowing production numbers, confidence across the
economy is tumbling. “Confidence in the construction, retail and
services sector has plumbed record low,” Tuvey wrote, pointing in
particular to the Turksat Economic Confidence Index, which
this month gave its worst reading since 2009. Based on past form,
Tuvey said, the data is “consistent with the economy contracting
by around 3% year on year.”

Here’s the chart:

Capital Economics

Thanks to a strong start to 2018, Turkey’s economy is likely to
grow at a solid pace over the course of the year, but in the
second half, a recession has clearly taken hold, Tuvey concluded.

“The economy is likely to contract by 2-4% y/y in Q4 of this year
and in the first half of 2019. Our forecasts for stagnation in
2019 and growth of 3.5% in 2020 lie towards the bottom of the
consensus,” he wrote.

“Overall, there’s no getting away from the fact that the Turkish
economy is experiencing a deep downturn.”