Slowdown Fuels Fears Turkey Will Push Stimulus It Can’t Afford

(Bloomberg) --

Turkey's nascent recovery is showing signs of weakness, fueling investors' fears that policy makers will be forced to stimulate the economy at the expense of the lira and a recent slowdown in prices.

Gross domestic product in the third quarter expanded a meager 0.4% from the previous three months -- less than all estimates in a Bloomberg survey -- as public sector and households hit the brakes on spending.

Monday's report by Turkstat is likely to pile pressure on President Recep Tayyip Erdogan, who is trying to regain popularity lost over rising unemployment and runaway consumer prices. The likelihood of expansionary policies worries investors, who say Turkey has little room for stimulus through lower borrowing costs or higher government spending.

“The pressure will continue to be on the central bank to continue to ease policy, and the risk as always is that the bank is pressured into easing policy more than the moderation in inflation ‘allows' for,” said Henrik Gullberg, a macro strategist at Coex Partners in London.

Inflation may have bottomed out and might accelerate in the near future as the impact of higher prices from a year ago fades, exposing the lira to a selloff, Gullberg said.

On the bright side, GDP grew 0.9% from a year earlier, the first annual expansion in 2019.

Slowing GDP

Quarterly growth fell from a revised 1% during the April-to-June period and compares with a median estimate of 1.1% in the Bloomberg survey. Household purchases of goods and services, the biggest driver of Turkey's economy, expanded 1.9% from the previous quarter, down from 3.4% during the April-to-June period. Government consumption growth fell to 1.9% from 2.2%.

Below are some of the highlights from the Turkstat report:

• On an annual basis, growth was driven by consumption. Household spending rose 1.5% and the government's rose 7%.
• Exports grew 5.1% year on year, down from 8.1% a quarter earlier. Imports jumped 7.6%, following a 17% contraction during the previous three months.
• What may be worrying policy makers is the declining contribution from Turkey's foreign trade, after growth was boosted by quarters of surplus on the back of last year's steep depreciation.
• Investments fell for a fifth time on a quarterly basis, as companies continued to reel from last year's lira depreciation and the higher borrowing costs that followed.

Room for Maneuver

Despite the worse than expected data, Treasury and Finance Minister Berat Albayrak said the recent pick up in industrial output at a time of economic “balancing” indicates accelerating growth during the final three months of the year.

In an attempt to promote growth, central bank Governor Murat Uysal has slashed Turkey's benchmark interest rate by 1,000 basis points since his surprise appointment in July. The monetary easing cycle has been accompanied by higher government spending on everything from salaries to infrastructure.

Monday's GDP data may result in an effort by the the president and his government “to support credit growth even stronger than expected, and we could see a very expansionary fiscal policy,” according to Guillaume Tresca, senior EM strategist at Credit Agricole.

That said, the government has only limited room to spend more heavily on infrastructure and consumption. The ratio of the government's budget deficit to GDP is expected to reach 2.9% at the end of the year, up from a previous forecast of 1.8%. The government sees the ratio remaining unchanged through 2021 but critics warn that government spending might be getting out of control.

Political issues are also clouding the economy's outlook.

The drama surrounding Turkey's ties with the U.S. has been keeping investors anxious since Erdogan went ahead with plans to buy an advanced missile-defense system from Russia. Erdogan's personal rapport with President Donald Trump has so far spared Turkey from sanctions over the arms deal, but U.S. lawmakers are likely to push for punitive action after Turkey began testing components of the Russian system last week.

The government dramatically increased its target for economic growth to 5% for 2020-2022, after cutting this year's forecast to 0.5%.

--With assistance from Tugce Ozsoy and Harumi Ichikura.

To contact the reporter on this story: Cagan Koc in Istanbul at ckoc2@bloomberg.net

To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, Amy Teibel, Mark Williams

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