Turkish Economy Suffers Historic Fall in Q1

The Turkish economy took a nosedive in the first quarter of 2009, plunging by 13.8% year-on-year (y/y) according to data from the Turkish Statistical Institute. The drop was the largest ever recorded for the country, far surpassing analysts' expectations, including that of IHS Global Insight. Combined with the fourth-quarter, 6.2% y/y decline, the Turkish economy is now officially in a recession, and an extremely deep one at that. The deep contraction undermines Turkish authorities' previous claims that the country would survive the current global economic downturn relatively unscathed. Instead, the Turkish downturn in the first quarter was among the steepest in the region, surpassed by only Estonia and Latvia.

Domestic demand plunged by around 22% y/y in the first quarter, largely driven by a sharp decline in both inventories and in gross fixed capital formation. The former posted a nominal decline of 15.400 billion lira in the first quarter of 2009, roughly five times the size of the decline posted in the same period of 2008. With the country facing an imminent economic decline, Turkish manufacturers and transport agencies were eager to decrease the level of inventory in the country in hopes of cutting costs on storage and upkeep. Along with the sharp degeneration of stocks, fixed capital spending plummeted as well. In the first quarter, gross fixed capital formation plunged a staggering 29.7% y/y. Fixed capital formation in January-March 2009 fell to a level not seen since 2002, as all financing for such spending either evaporated or became prohibitively expensive. Incentive for potential investment was further undermined by the sharp decline in export demand that left manufacturers facing a sharp rise in idle capacity. With manufacturers increasingly idle, workers were laid off by the thousands, contributing to a 9.2% y/y decline in final household consumption within the Turkish borders. Of very little surprise, government consumption was the only domestic expenditure category that did not contract in the first quarter, instead increasing by 5.7% y/y as the government ramped up spending in advance of March municipal elections.

The loss of export devastated domestic demand, and as an expenditure category for GDP, exports of goods and services fell by 11.3% y/y. Demand from Europe, a key export market, evaporated with the onset of the economic and financial crisis that has crippled the world. However, the overall impact of net trade was positive, given the staggering, 31.9% y/y plummet of imports of goods and services. The afore mentioned problems with domestic demand sent imports spiralling downward.

On the value-added measure of the economy, the loss of export demand devastated the manufacturing sector, where value-added plummeted by 18.5% y/y. With manufacturing output falling so dramatically and trade volumes plummeting, the transportation and communication sector also fared extremely poorly in the first quarter of 2009, its value-added dropping 17.6% y/y. However, the worst performing value-added sector was the wholesale and retail trade sector, where value-added plunged by 25.4% y/y. With manufacturers laying off employees by the thousands, credit extremely tight, and manufacturers curtailing their orders for raw materials, both wholesale and retail trade activity shrank significantly. A relatively stable banking system, however, boosted the financial intermediation sector by 10.8% y/y in the first quarter.

Outlook and Implications

The extremely poor performance of GDP in the first quarter severely undermines Turkish authorities' repeated proclamations that the economy would survive 2009 relatively unscathed from the current global downturn. The government's projection of GDP contraction for 2009 as a whole of only 3.6% is clearly out of reach based on first-quarter data. Even IHS Global Insight's full-year projection of a 5.2% y/y decline is looking conservative now based on first-quarter performance. While the first-quarter downturn may well be the nadir of the current recession, the economy will certainly contract throughout the rest of 2009, and in the second and third quarters, this fall will likely remain substantial. In particular, there may be a worsening of the household consumption performance in the second and third quarters as labour markets further deteriorate. Thus, for 2009 as a whole, the full-year contraction may come in close to 6% or even 7%, depending on the country's tourism season.

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