Well, Turkey sank into a technical recession in Q4, the first in a decade, a development that, while expected, isn’t likely to please NATO’s favorite autocrat ahead of key local elections.
The Turkish economy shrank 2.4% QoQ in Q4 after a 1.6% contraction in Q3. Generally speaking, this is being billed as a direct consequence of last year’s tumult, characterized as it was by the lira’s collapse and a diplomatic row with Washington that was even more contentious than usual.
Relive Turkey’s 2018 mini-currency crisis via our lira archive
On a YoY basis, the economy shrank 3% in Q4, the worst showing since 2009 (see below). For the full year, the economy grew 2.6%.
Turkish officials are keen on using the YoY measure, so the recession likely won’t be pitched as such domestically. Private consumption dove nearly 9% in Q4, while the construction sector shrank 8.7% YoY for the period.
This comes less than a month after data showed industrial production dove by the most since June 2009 in December, falling an annual 9.8% (we’ll get the January figures this week).
Again, this comes at a decidedly inopportune time for Recep Tayyip Erdogan, who is engaged in the usual pre-election push to shore up AKP ahead of municipal polls later this month.
HDP has aligned itself with CHP for the local races in an effort to bring together the country’s normally fractious opposition forces. Ultimately, the goal is to hand Istanbul and Ankara to the opposition bloc, sending a message to Erdogan in the first test of his popularity since last summer’s landmark election that consolidated even more power in the presidency. CHP is of course playing down the “secret” alliance with HDP amid Erdogan’s ongoing anti-Kurd rhetoric, but the strategy is clear: channel all opposition votes to a bloc that can actually make some headway.
That’s the political backdrop against which Turkey’s economic woes are set. The economy’s slide into recession also comes as CBT walks a fine line between guarding against another leg of lira depreciation on the heels of last year’s surge in inflation and not choking off growth, thereby incurring Erdogan’s wrath.
“The decision was no surprise to the market in light of the details of [the] monthly price developments report which highlighted a rise in seasonally adjusted core inflation in February”, BNP wrote last week, after CBT held rates steady. “We see resilience in CPI survey expectations and seasonally adjusted core inflation, and upside risk from a reversal of administered price cuts as supporting the case for the CBRT to maintain its tight policy and keep the policy rate at 24% until June”, the bank added.
“We think the CBT [keeping rates on hold] should help exchange rate stability and result in a decisive decline in inflation [beginning] in 2H19, but inflationary pressures remain”, BofAML said recently, echoing the sentiments of pretty much everyone who’s weighed in on this lately.
While CBT is on hold for now, it goes without saying that the worse the data gets, the more likely it is that Erdogan will start demanding looser policy.
“My sense is the recession will be deeper and longer than previously (imagined) given the balance-sheet nature of (the downturn),” BlueBay’s Tim Ash said Monday, adding that “any early monetary policy easing will make things much worse.”
Meanwhile, Ankara is embroiled in yet another diplomatic spat with Washington over the purchase of Russian missile systems. Despite warnings from the US that going forward with the deal would imperil relations with the Trump administration, Erdogan is adopting a characteristically obstinate tone, after staying silent on the issue for longer than usual.
“It is out of the question for us to revoke the S-400 deal”, he told TV24 television last week, before noting that “such an immoral act would not suit us”.
Yes, far be it from Erdogan to engage in any “immoral acts.”
On top of that, Ankara and Washington are still trying to sort through the implications of Trump’s decision to pull troops out of Syria, a move that will put Syrian Kurdish forces at risk of being slaughtered by Erdogan.
Oh, and then there’s Trump’s decision to do away with trade concessions permitting duty-free entry for some Turkish exports. That too has the potential to be a flashpoint in US-Turkey relations.
For his part, Erdogan’s son-in-law Berat Albayrak (whose installation as economic czar last July effectively confirmed the market’s worst fears with regard to Erdogan’s determination to enshrine his unorthodox economic “theories” into the fabric of policymaking) struck an upbeat tone on Twitter following the release of the Q4 GDP data.
“[The] worst expectations on economic growth haven’t been realized”, Albayrak declared, adding that “despite the fourth quarter contraction, net foreign demand’s contribution to growth signals that [the] balancing process continues as foreseen [and] actual 2019 data show [the] economy is in a rapid recovery trend.”
Take that for whatever it’s worth – or isn’t worth, whichever the case may be.