Turkey entered its first recession in a decade at the end of 2018 as a collapse in the lira and a sharp hike in interest rates brought economic growth to a halt.
The economy contracted by 3 per cent per cent year-on-year in the fourth quarter of 2018, according to official data released on Monday. Seasonally and calendar adjusted gross domestic product decreased by 2.4 per cent on a quarterly basis.
The timing of the news is deeply uncomfortable for Recep Tayyip Erdogan, the Turkish president, who is battling to retain control of Istanbul and Ankara in nationwide local elections at the end of March.
The depth of the fourth quarter contraction was slightly worse than expected. In a Reuters poll economists had forecast a 2.7 percent year-on-year slump.
Coming after a quarterly contraction in the third quarter of 2018, Monday’s fourth quarter data means that Turkey officially entered a recession, defined as two consecutive quarters of negative growth.
Mr Erdogan’s ruling party swept to power in 2002 on the back of a severe financial crisis. He has built 16 years of successive election victories on the back of rising prosperity for the country of 82m people.
Opposition parties, who have made the country’s 20 per cent inflation rate and rising unemployment the centrepiece of their local election campaign, can now add recession to their list of gripes with the government.
The figures also showed that Turkey’s full-year GDP growth was 2.6 per cent in 2018 — down sharply from the previous year’s stimulus-fuelled 7.4 per cent growth.
Economic indicators have for months suggested that growth had slowed sharply in the aftermath of last summer’s dramatic currency crisis, which was triggered by a bitter row with between Turkey and US President Donald Trump.
The crisis in relations between Ankara and Washington caused a rapid depreciation in the lira, sending the currency to a series of all-time lows against the dollar and causing fears of contagion across emerging markets.
But the depth of the fourth quarter contraction was worse than expected by economists. A Reuters poll prior to Monday’s data had forecast a 2.7 percent year-on-year slump.
The extreme volatility eventually forced the country’s central bank to steeply hike its benchmark interest rate to 24 per cent in September. The move helped to belatedly reassure investors and stabilise the currency. But it also sent shockwaves through the wider economy, triggering a plunge in lending by the banks and a sharp fall in business confidence and consumer spending. Industrial production, car sales and housing sales have all plummeted in recent months.
Berat Albayrak, the Turkish finance minister, acknowledged the slowdown in growth following Monday’s data but blamed it on a “speculative attack” by unnamed outsiders, and said that the worst of the country’s economic problems were now behind it. “The worst growth expectations did not materialise,” he wrote on Twitter.
Mr Albayrak said that the data showed that Turkey would avoid a repeat of a 2001 Turkish crisis, and a 2008 slowdown when the country reeled from the impact of the global financial crisis.
“Despite the most serious speculative attack [on a country] in history, and a period when global growth has started to slow, a situation akin to 2001 and 2008 has not materialised. We have successfully overcome it in a very short time.”
That stance is at odds with the views of many economists, who fear that rising non-performing loans will limit the ability of Turkish banks to support a return to growth. The country’s corporate sector is saddled with foreign currency debt that has become more difficult to pay back after last year’s 30 per cent plunge in the value of the lira versus the dollar.
Tim Ash, an analyst at BlueBay Asset Management, said that the “key question” was whether Turkey would have a V-shaped recovery of the kind it had enjoyed in the past, with a sharp slowdown followed by a rapid recovery.
“My sense is the recession will be deeper and longer than previously given the balance sheet nature of this recession,” he wrote in a note to clients.
The global financial environment has helped to support Turkey and emerging markets more broadly in recent months, with delays to rate hikes by the US Federal Reserve and the European Central Bank helping to sustain flows of funds into riskier countries. But analysts warn that the country’s reliance on foreign financing makes it highly vulnerable to sudden shifts in sentiment.
While international investors have been reassured by the Turkish central bank’s commitment to keeping rates on hold since September, they will be watching eagerly to see if that stance continues after the March 31 polls.