Economic Analysis - Q3 Growth Rate Masking Vulnerabilities - 18 DEC 2017

BMI View: Turkey ' s very strong year-on-year GDP growth rate in Q317 was flattered by base effects from a contraction in Q31 6 , while growth actually slowed in quarter-on-quarter terms , indicating a loss of momentum . Nevertheless, government stimulus has heightened overheating risks, and the current pace of growth is unsustainable.

Real GDP growth in Turkey accelerated markedly in Q317, leading us to revise upwards our 2017 growth forecast from 5.3% to 6.9%. Seasonally and calendar adjusted real GDP expanded by 9.6% y-o-y in Q317, up from 6.4% the previous quarter. In non-seasonally adjusted terms, Q317 growth came in even higher at 11.1% y-o-y. It should be noted that the year-on-year growth readings were flattered by base effects stemming from a contraction of real GDP witnessed in Q316 following the failed coup attempt in July 2016 ( see chart below). Indeed, in quarter-on-quarter terms, seasonally and calendar adjusted real GDP growth actually decelerated in Q317, coming in at 1.2% from 2.2% the previous quarter.

Base Effects Flattering Annual Growth Rate
Turkey - Real GDP, Seasonally And Calendar Adjusted, % chg
Source: Turkstat, BMI

The growth composition in Q317 was well balanced. Looking at the expenditure breakdown, household final consumption increased by 8.9% y-o-y and government final consumption contracted by 0.5%, while gross fixed capital formation and exports increased by 12.4% and 17.2% respectively. In line with strong domestic demand, import growth also came in strong at 11.7% y-o-y.

Growth Across The Board
Turkey - GDP By Expenditure Components, Seasonally And Calender Adjusted, % chg y-o-y
Source: Turkstat, BMI

That said, we continue to believe the current of growth is unsustainable due to clear evidence of overheating ( see ' Overheating Risks Evident ' , 22 November). The government has supported economic activity in 2017 through a combination of fiscal stimulus measures and a loan guarantee programme, which have been largely responsible for surging domestic demand in recent quarters. This has been accompanied by rapidly rising inflation, higher market-based interest rates and a weaker currency, all of which will weigh on consumption and investment. Stronger domestic demand has also exacerbated Turkey's structural savings deficit and corresponding current account deficit - with the latter standing at 4.7% of GDP in Q317.

Twin Deficit A Concern
Turkey - Current Account & Fiscal Balance
Source: Bloomberg, BMI
see'Tax Hikes Proposal Highlight Government's Rising Footprint', 12 0ctober)