Q3 growth at 3-year low, gov't to revise year-end goals

People work at an atelier in the western province of Kocaeli on March 12, 2012. (Photo: Today’s Zaman, Cahit Kılıç)

December 10, 2012, Monday/ 10:20:00

Turkey's gross domestic product (GDP) growth slowed down to 1.6 percent in the third quarter over the same months of 2011, far below the market expectations of 2.6 percent, according to data released by the Turkish Statistical Institute (TurkStat) on Monday.

Turkey's gross domestic product (GDP) growth eased to a lower-than-expected 1.6 percent in the third quarter of 2012 over a year ago, signaling a fresh revision in the government's year-end growth targets, data from the Turkish Statistics Institute (TurkStat) revealed on Monday.

With weak domestic demand undermining economic expansion despite a relatively stronger export performance in the first nine months, the third quarter growth was 1 percentage point below the market's expectation of 2.6 percent. This is now challenging the government's year-end targets. The government's revised year-end growth forecast stands at 3.2 percent. Considering the weak performance, observers argued that Ankara may have to further slash this rate. In the first signal of official confirmation of projections being revised downwards, Development Minister Cevdet Yılmaz said on Monday in Ankara that the “year-end growth goal could be revised to 3 percent.”

The average growth in the first three quarters of this year was 2.6 percent. The calendar-adjusted GDP in the third quarter of 2012 increased by 1.9 percent compared to the same quarter of the previous year, while the seasonal and calendar-adjusted GDP increased by 0.2 percent compared to the previous quarter. While Turkish GDP recovery entered its 12th quarter, the latest figures marked the worst growth performance since the third quarter of 2009.

In reactions from markets to Monday's data, the Turkish main share index, the İstanbul Stock Exchange (İMKB), was virtually flat, up 0.49 percent at 76.617 points at 3:50 p.m. (Turkish time). One US dollar was being traded at TL 1.79 while one euro bought TL 2.31 on Monday afternoon. The yield on the two-year benchmark bond inched down to 5.73 percent from Friday's close of 5.76 percent.

Following a speedy growth in the past two years, Turkish authorities stepped up measures to engineer a “soft” or “safe” landing this year. Among these were measures to curb domestic demand with limited loan growth. Since last December, the Turkish Central Bank has worked to curtail domestic demand by making it more difficult for people to take out loans from banks as a measure against excessive spending. This, observers argue, may now prove to be a policy that undermines recovery in private investments, the engine of economic growth in Turkey. Turkish domestic private consumption declined 0.5 percent in the third quarter, while an 11.1 percent decrease in the non-financial sector's capital investment followed this in the same period, Monday's data showed. On the other hand, public sector investment grew by 11.2 percent, backing overall growth.

“The central bank placed an exaggerated importance on this goal and believed a slowdown in economic growth and domestic demand would strengthen the bank's hand in achieving it. … This now strikes back to drop economic growth to levels below Turkey's potential,” Süleyman Yaşar told Today's Zaman in a phone interview.

“Well, if you ask me, I cannot say I am happy with the latest growth rate. …We could have done better,” a visibly grave Economy Minister Zafer Çağlayan told reporters in İstanbul on Monday. Underlining that much of the credit in growth goes to exports, Çağlayan said: “Were it not for the contribution of exports, we could have seen our economy shrink by 1.8 percent instead of growing at 1.6 percent in the third quarter of 2012.” Çağlayan underlined that there would be a better GDP performance in 2013 thanks to an anticipated recovery in exports as he called on the central bank to take steps to help reinvigorate growth.

“Strong domestic demand and exports will be the two major channels feeding Turkey's growth in 2013. Thus, growth next year will be higher compared to 2012,” Turkish Central Bank Governor Erdem Başçı was earlier quoted as saying.

Turkey estimates its GDP growth to be around 4 percent in 2013.

“A range of factors is coming together to slow the Turkish economy pretty dramatically,” wrote Tim Ash from Standard Bank in a research note, citing the global growth slowdown, the eurozone crisis, the doubling of Turkish interest rates during the year, the impact of the civil war in Syria on Middle East trade routes and the perception of political risk within the country itself.

In separate data from TurkStat on Monday, Turkey's industrial production suffered a 5.7 percent contraction in October compared to same month in the previous year. “Exports have remained a critical contributor of growth but we see that the contribution of exports was limited in the third quarter compared with previous quarters. … In addition, industrial output in almost all of the export-oriented sectors contracted, sending warning signals for the final quarter,” Yaşar argued.

Turkey was among the world's fastest-growing economies in 2010 and 2011, with 8.9 and 8.5 percent annual growth, respectively. The average growth from 2007 to 2011 was 3.5 percent. This performance, however, raised concerns in Ankara that growth could spin out of control to peril budget balances, leading to cooling measures. Observers cited these measures -- which brought about only limited contribution from domestic demand to growth -- for the weaker-than-expected GDP performance in the third quarter, among others. Meanwhile, the current account deficit (CAD), the weakest point in the Turkish economy, continued to decline, TurkStat data found. The share of CAD in the GDP was 7.2 percent for the past 12 months.

Weak growth spells new interest rate cut

The third quarter's weak growth and industrial output data boosted expectations on Monday that the central bank could cut rates in December to counter a slowdown in the economy.

The bank is due to hold its policy meeting on Dec. 18.

Aiming to counter the economic slowdown, Turkey's central bank has been easing monetary conditions since the middle of the year. At its meeting in November, it cut its overnight lending rate to 9 percent for the third time and said it may consider reducing its policy rate and overnight borrowing rate if necessary to ensure financial stability. The bank's overnight borrowing rate currently stands at 5 percent and the policy one-week repo rate is at 5.75 percent. “The bank is now expected to ease both the policy and the lower end of the overnight interest rate corridor,” Yaşar told Today's Zaman.

The central bank has dropped the top end of its interest rate corridor by 250 basis points since September to 9 percent and kept bank borrowing costs near the bottom of the range in recent weeks, without reducing the 5.75 percent benchmark. Its overnight borrowing rate, the bottom of the corridor, is 5 percent. EFG İstanbul chief economist Haluk Bürümcekçi said the latest figures would urge the central bank to maneuver for a cut in key rates. Çağlayan also joined the chorus on Monday, estimating a central bank cut in the overnight borrowing rate. “The data was weaker than expected, which gives the central bank more leeway to cut its rates. Therefore, we saw limited buying in the market. As investors expect a measured rate cut and this is the year-end, the trading volume is thin,” said Burak Maldar, a vice president at Halk Yatırım.

“We expect the bank to cut its overnight borrowing rate and its policy rate by 25 basis points,” Maldar said, adding that the two-year yield would stay above 5.7 percent until Dec. It hit a record low of 5.67 percent last Wednesday.