Turkish GDP growth fades to 1.6%

Cenbank seen holding rates steady

ANKARA, Dec 10, (RTRS): Turkish economic growth dwindled to 1.6 percent year-on-year in the third quarter, data showed on Monday, falling short of forecasts as a currency crisis and soaring inflation led to the worst economic performance in two years.

Turkey, a major emerging market once seen as a star performer by international investors, racked up growth of more than 7 percent last year. But this year it has been battered by a lira selloff that has driven up the costs of food and fuel and forced the central bank to hike its main rate to 24 percent.

The construction sector – long a beneficiary of Turkey’s credit-fuelled building boom - contracted 5.3 percent yearon-year, the data showed, countering a 4.5 percent expansion in services.

“The loss in growth momentum began in the third quarter with a slowdown in private consumption and investments,” said Muammer Komurcuoglu, an economist at Is Invest.

“We envisage a contraction in growth in the fourth quarter as a result of the negative impact of monetary tightening on financial conditions, a reduction in investment and consumption appetite with the loss in lira value, and high inflation.”

In a Reuters poll, economists had forecast third quarter growth of 2.0 percent year-on-year. The lira eased to 5.3047 against the dollar after the data from 5.2950 beforehand.

By 0918 GMT the lira was at 5.2760 to the dollar.

It was the worst quarterly performance since the third quarter of 2016 – when Turkey was shaken by an attempted coup against President Tayyip Erdogan.

Output shrank a seasonally and calendar-adjusted 1.1 percent from the previous quarter, the data showed.

“The effects of August’s currency crisis caused Turkey’s economy to contract in Q3 and more timely evidence suggests that the downturn deepened in Q4,” Jason Tuvey of Capital Economics said in a note to clients.

Revised data showed the economy had expanded 5.3 percent year-on-year in the second quarter, from a previously reported 5.2 percent.

Weaker

The lira has slumped 28 percent against the dollar this year, but has rebounded from record lows in August when it was as much as 47 percent weaker against the US currency.

The lira crisis sent annual inflation to more than 25 percent in October, its highest rate in 15 years, before easing in November.

Turkey’s central bank is likely to keep its main interest rate on hold at 24 percent this week, a Reuters poll showed on Monday, following a bigger-than-expected decline in November inflation.

All 20 economists polled by Reuters expect the CBRT central bank to keep its one-week repo rate steady at Thursday’s policy-setting meeting. Inflation last month eased to 21.6 percent after hitting a 15-year peak of more than 25 percent in October.

That was a bigger decline than the market had expected and is widely seen as giving the central bank some breathing room. The bank has been reluctant to hike interest rates, investors say, because of President Tayyip Erdogan’s drive for lowering borrowing costs.

“It would be a monumental mistake to ease policy,” said Per Hammarlund, chief economist for emerging markets at SEB. “Investor confidence is hanging by a thread, and a premature easing would further undermine the credibility of the CBRT.”

Concerns about the central bank’s independence and a diplomatic rift with the United States sparked a currency crisis this year, sending the lira down more than 40 percent against the dollar at one point and deepening concern about the wider impact on the economy and banks.The currency has since recouped some losses, although it is still down nearly 30 percent this year. The relative strengthening in the lira, as well as lower oil prices and government-driven discounts on consumer products, have helped to slow inflation’s rise.

The central bank said last week it would stick with a 5 percent inflation target, a very ambitious goal that investors are not expecting to see met any time soon.