Turkish Economy Expands 5.9% in Q3 2023
Bottom Line: Turkish Statistical Institute (TUIK) announced on November 30 that the economy expanded by a 5.9% YoY in Q3 2023, driven by the strong domestic demand and lending, public investments and massive construction projects after February 6 twin earthquakes. (Note: GDP expanded 0.3% in Q3 from Q2 in seasonally and working-day adjusted terms.) Despite strong Q3 figure, we expect GDP growth to partly slowdown in Q4 due to continued hawkish bias by the Central Bank of Republic of Turkiye (CBRT) in the last six months, fiscal actions suppressing demand and squeeze lending, elevated inflation, and increasing trade deficit. We now foresee the Turkish economy to grow by 4.3% in 2023.
Figure 1: GDP (%, YoY), Q3 2019 – Q3 2023
Source: Datastream, Continuum Economics
When the activities which constitute GDP are analyzed in Q3, construction sector made the highest contribution to the economy with an 8.1% YoY rise, followed by 5.7% in the industry sector and 5.1% in the financial and insurance sector. It is worth mentioning that the agriculture sector grew only by 0.3% YoY, particularly due to twin earthquakes on February 6, which hit the southeast of the country, decreasing contribution of the region on the overall agricultural activities.
Following GDP growth announcement, the treasury and finance minister Mehmet Simsek stated that "Compared to the first half of the year, the contributions of domestic demand to growth fell, while the negative contribution of net exports decreased relatively. Private consumption also contracted, while investment and exports grew when compared to the previous quarter."
Despite the positive growth release, the country continued to struggle due to galloping inflation, weakening Turkish Lira (TRY), jumping trade deficit in Q3. Buoyant domestic demand and lending in mentioned quarter has revived a recovery in imports which triggered the TRY to lose value in this quarter. (Note: TRY weakened by 10.9% against the dollar in Q3). In addition to this, low demand for Turkish exports, particularly due to EU slowdown, negatively impacted the Turkish exports in Q3.
On the foreign trade front, exports decreased by 0.5% and imports increased by 1.2% in January-September 2023 when compared with the same period in 2022, demonstrating the fall in foreign trade income. The foreign trade deficit increased by 4.9% to $87.2 billion in the mentioned period while exports were $187.2 billion, and imports hit $274.4 billion. We believe the decline in export revenues in addition to the country's heavy dependence on imported inputs for exported goods, which are increasingly expensive due to TRY devaluation, continue to jeopardize GDP expansion in the upcoming quarters.
The CBRT continues to raise policy rate to establish the disinflation course as soon as possible, to anchor inflation expectations, to control the deterioration in pricing behavior and to squeeze demand. We think the GDP growth will partly slowdown in Q4 as the aggressive monetary tightening continue to cool demand, with lagged impacts of the tightening cycle are still feeding through. On the other hand, we also feel it is likely that fiscal spending and stimulus will soar again in Q4 2023 and Q1 2024 as the local elections are planned for March 2024, which may partly stimulate growth. Taking into account all of these, we now foresee the Turkish economy to grow by 4.3% in 2023.