Turkey’s Economy Enters Recession, Pressuring Central Bank for Rate Cuts

Turkey’s GDP declined by 2.4% in the first quarter of 2019 after declining by 3% in the last quarter of 2018.

Turkey entered into recession in the third quarter as industry production fell, further supporting the central bank’s decision to reduce the interest rates.

According to data from the state statistics agency, the $1.3 trillion GDP was reduced by 0.2% every quarter, making it the second consecutive decline after the previous period was corrected to a contraction. The third quarter annual growth rate was 2.1%, less than the forecast of 2.5%.

The high interest rate has persisted for most of the year. It can be seen in the annual growth rate, which is significantly lower than the first quarter and the average before the pandemic, which was above 5%.

In the third quarter, industrial output decreased by 2.2% while household consumption spending increased by 3.1% year over year.

The central bank is fighting to keep inflation under control at almost 49% with a tight monetary policy by maintaining its key rate at 50% for eight consecutive months. As a result, industrial production has slowed, but the domestic demand remains strong, partly because people in Turkey are delaying buying various goods to avoid even higher prices.

According to Emre Akcakmak, a senior consultant with East Capital International AB in Dubai, slower-than-expected GDP growth may have a bright side. Investors would now be more interested in soft landing and long-term decline in inflation rather than prioritizing fast economic growth.

Okan Ertem, senior economist at Turk Ekonomi Bankasi AS, states that consumption is still the biggest driver of gross domestic product growth, even though it has decreased every quarter for the past two quarters.

It indicates that Turkey is getting closer to the output level, which could support the disinflation process and reduce import volumes quarterly and yearly.  

According to the Turkish central bank, inflation will peak this year at 44% and decline to 21% by the end of 2025.

Earlier this month, the central bank hinted that the rate cut would soon make sense as the inflation is declining. The speed of expected monetary eases will significantly impact the growth in the upcoming quarters.

In the past, President Recep Tayyip Erdogan has prioritized economic growth over price stability. After his reelection in 2023, a new economic team led by Finance Minister Mehmet Simsek prioritized more market-friendly measures.

Since the economy is facing its first recession since 2018, investors wonder whether President Recep Tayyip Erdogan will return to his policies that support growth.

In 2018, Turkey‘s economy faced recession after a long time since the global financial crisis in 2008.

According to reports, Turkey’s GDP declined by 2.4% in the first quarter of 2019 after declining by 3% in the last quarter of 2018.

It was followed by a 1.6% decline in the previous quarter, making it two consecutive quarters of declining growth, the definition of recession.

Due to the trade war with the United States, the Turkish currency lira dropped, increasing the costs of imports.

There have been warning signs for the past few years regarding Turkey’s economic situation. The previous recession has impacted the car, housing sales, and industrial production.

This made the central bank increase the interest rates, which made borrowing costly.

The biggest challenge was reducing volatility in markets as the Turkish lira depreciated to a record low, reducing the investor’s confidence.

Due to its political strains with the United States, Turkey, highly praised for its economic record during the previous ten years, is now struggling.

In August 2018, US President Donald Trump increased the tariffs on Turkish steel and aluminum imports amid a diplomatic crisis over the custody of American pastor Andrew Brunson. Trump threatened to destroy its economy in January if it launched its troops into Syria for retribution to Kurdish groups that were formerly American partners against the Islamic State.