Turkish Economy Expands 2.9% in Second Quarter as Rebalancing Deepens

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Researched by Industrial Info Resources (Sugar Land, Texas)--The Turkish economy grew 2.9% year-over-year in the second quarter of 2012, down from 3.3% yearly in the first quarter. According to figures released by the Turkish Statistics Institute (TURKSTAT), the economy expanded by a surprisingly strong 1.8%, having contracted 0.1% in the first quarter.

Rebalancing in the economy deepened in the second quarter, with domestic demand and external demand contributing - 2.8% and 5.7%, respectively, to growth. The respective figures in the first quarter were -1.3 and 4.6%. Public consumption was up 4.4%, adding 0.4 percentage points to gross domestic growth (GDP) growth and confirming the recent worsening in fiscal performance.

Private consumption declined 0.5% for the first time in three years, while pri-vate investments were down 7.9% in the second quarter. The weakest post-crisis private sector investment figure pulled the growth number down 2%. In contrast, the exports were up 19.8% and imports were down 3.6%.

The GDP data showed that while domestic demand is still contracting, a boom in exports has kept the Turkish economy out of recession. "Although Turkish exporters have a done a good job in diversifying away from the slow-growing EU [European Union] to the faster growing Middle East-North Africa (MENA) region, exports have also started to lose momentum in the second half of this year," said Yarkin Cebeci, a senior economist at J.P. Morgan Chase in Istanbul. "The contribution of net trade to total growth was a full 5.7%. This means that had there been no external rebalancing, the economy would have contracted 2.8% yearly in the second quarter."

Recently, Turkish Deputy Prime Minister Ali Babacan, Finance Minister Meh-met Simsek and some Central Bank of Turkey (CBT) officials pointed out that full-year growth may fall below the government's medium-term plan pro-jection of 4%. Indeed, several early indicators point at weakening economic activity in the third quarter, as also indicated recently by the CBT.

Capacity utilization in manufacturing has been declining. Consumer confi-dence is reasonably high, but has been falling, and most real sector confi-dence indicators are showing weakness. Both domestic and export orders have been dropping, and a relatively significant downward trend is being seen in planned business investment expenditures. Moreover, employment prospects from business surveys show weakening, and the unemployment level seems to have stabilized over the past five months after a long period of significant decline.

Interest Rate Change

With weakening domestic demand, the CBT may start cutting the upper band of its interest rate corridor. The CBT manages monetary policy within a 5.75% to 11.50% interest rate corridor. The upper end of the corridor was lowered from 12.5% originally back in February.

"The CBT has indicated that growth lost momentum in the third quarter and that the rate corridor will be narrowed gradually going forward," Akyurek said. "We expect the top may be cut 100 basis points at the next meeting on Sep-tember 18, as an easing signal to the markets," said Cem Akyurek, a senior economist at Deutsche Bank in Istanbul. "While the outlook and polices abroad will play a greater role in determining the pace of monetary policy ad-justment, the latest GDP number may strengthen their case marginally."

The Turkish government is targeting a 4% growth in GDP in 2012, while the International Monetary Fund forecasted Turkey's year-end 2012 growth at 2.3%. The Turkish economy grew an annual 8.5% in 2011, the fastest pace among Organization for Economic Cooperation and Development countries' economies, other than China and Argentina. The economy contracted 0.4% in the first quarter of this year, the first contraction since March 2009.

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