Turkey’s recession and the inflation clamp
Two important data were announced last week. The first was second quarter growth, in which we experienced a contraction of 1.5 percent in line with expectations. Although not a big surprise, the 22.8 percent decline in capital investments was painful. 29.2 percent of this decline is due to construction and 16.9 percent is due to machinery and equipment investments. Especially the decrease in machinery-equipment investments is very worrying in terms of future prospects. When we look at the course of this expenditure component in recent years, we see a significant slowdown since 2011 and a significant contraction since the beginning of 2018.
Parallel to the decline in national output, consumption of households has continued to decline for the third quarter. Obviously, there was an expectation that there would be some positive increase in consumption in the second quarter due to the fact that the election calendar was behind in the beginning of year forecasts. However, this did not happen. Although the contraction in consumption, at 1.1 percent, is better than the contraction of 4.8 percent in the first quarter, it is not sufficient. In the same period, government spending, with an increase of 3.3 percent, contributed to growth, albeit to a limited degree. However, with the rapid and sharp deterioration in the budget, the possibility of continuing this contribution in the second half of the year seems to have disappeared. On the other hand, net foreign trade (decrease in imports + increase in exports), which contributed to national income by two percent in this period, will continue its positive contribution in the second half, albeit with a decrease.
Inflation data is better than expected at 0.86 percent. Food prices, which have the highest share in CPI at 23.3 percent, as in recent months, continue to be a positive surprise. This month, due to the base effect, we experienced a 12-month inflation decrease of 1.7 percent. But comparatively, the average inflation rate for the last 14 years is 0.17 percent, much lower than this month. This essentially indicates that inflation has not yet normalized. As a result of public hikes, September inflation will also remain above the trend. In the meantime, no one should have the delusion that the inflation rate has normalized since 6.3 percent of September 2018 inflation will come out of the series. September inflation will be well above the 14-year average of 0.76.
Obviously, under these circumstances, given the general macroeconomic balances and global economic developments, I do not think the Central Bank has as much room for interest discount as the market hopes. Yes, we will see headline inflation decline in September and in October, but by the end of the year, “real” inflation is likely to remain above 15 percent.