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Turkey’s economy slowed in the second quarter but fared better than forecast, as the country’s recovery struggled to take hold at a time of political uncertainty.
Gross domestic product expanded a seasonally adjusted 1.2% from the previous three months, according to data released on Monday, down from a revised 1.6% in the first quarter. The median of six forecasts in a Bloomberg survey was for an increase of 0.4%. From a year earlier, GDP shrank 1.5%.
Turkey exited its first recession in a decade in the first quarter, but the economy has struggled to keep up momentum as President Recep Tayyip Erdogan’s ruling AK Party refused to concede defeat in the race for Istanbul mayor in March, denting consumer and business confidence. The prospect of punitive U.S. sanctions compounded the negative sentiment.
Foreign investors who balked at the risks pulled their money out and households started hoarding dollars. Meanwhile, the lira suffered the biggest drop in emerging markets in the second quarter, giving way to an outsized draw-down of the central bank’s limited reserves.
This all led to “a tightening of financial conditions” which “manifested in higher market interest rates and slower credit growth,” Inan Demir, an economist at Nomura International Plc in London, said on Friday. Demir had penciled in a 0.5% quarterly expansion.
Investment Slump
The slowdown in quarterly growth was driven by a slump in investments, which shrank 7.4% from the previous three-month period, according to a breakdown of GDP data by Turkstat.
On an annual basis, businesses’ spending on machinery fell 22.8%, the biggest drop since at least 2016. The annual contraction in the economy was driven by that and consumer spending, which shrank 1.1%.
Government spending, usually a big driver of GDP growth, rose 3.3% from year earlier while exports rose 8.1%.
The lira has since stabilized and policy makers have started easing access to liquidity -- central bank governor Murat Uysal slashed the benchmark rate by a record 425 basis points in July, undoing some of the monetary tightening designed to backstop the currency.
But continued growth now hinges on banks’ ability to extend credit.
On an annualized basis and adjusted for foreign-currency fluctuations, credit expansion is hovering below 5% after briefly touching 20% in April. This comes despite a more than 10 percentage point drop in lira loan rates and government measures designed to prop up lending.
Read more: Turkey Inc.’s Zombie Side Frustrates Latest Push for Credit Boom
Meanwhile, consumer confidence is hovering near a five-year low, and leading indicators such as industrial production point to further pain. While the economic headwinds are unlikely to tip the economy back into technical recession, growth will probably fall short of the government’s 2.3% target for 2019.
The median estimate in a Bloomberg survey of economists sees the economy shrinking 1.5% in 2019, the first annual contraction since 2009. Still, Treasury and Finance Minister Berat Albayrak in July said he expects Turkey to post a positive rate of growth for the year.
(Updates with details of GDP performance in sixth paragraph.)