Turkish GDP growth holds steady in Q2 - Wells Fargo

"Real GDP growth in Turkey was 5.1 percent year-ago in Q2, slightly below the pace seen in Q1. Strong private demand, faster growth throughout Europe and a stable lira bode well for the Turkish economy," notes Wells Fargo Research Team.

Key quotes:

"Real GDP growth in Turkey was 5.1 percent year-over-year in Q2, 0.2 percentage points below the Bloomberg consensus. A 0.2 percentage point upward revision to the Q1 reading, however, made this small miss essentially a wash."

"A breakdown of economic growth into its supply-side components showed broad-based strength. Agriculture posted a 4.7 percent gain over the year, output in the service sector grew 5.7 percent and production in the industrial and construction sectors both grew in excess of 6 percent over that period. Data from the demand-side was a bit more uneven. Steady personal consumption, a pick-up in investment and continued strength in export growth drove economic growth. Government spending retrenched, however, declining 4.3 percent year-over-year. In late 2015 and 2016, the Turkish government enacted a series of fiscal stimulus measures and increased spending related to the Mediterranean refugee crisis, boosting government expenditures. As we enter the second half of the year, the government’s direct contribution to GDP growth from these policy changes has begun to fade".

"Strengthening Lira Should Help Stabilize Inflation"

"The Turkish lira’s slide against the dollar since 2010 has been pronounced (middle chart). The additional sharp depreciation in the second half of 2016 helped to push inflation well above the Turkish central bank’s 5 percent target (bottom chart). Tighter monetary policy followed as policymakers attempted to combat the jump in inflation. That said, the outlook for the Turkish economy has brightened relative to the past year. The depreciation of the lira and stronger global growth, particularly in the Eurozone, have driven double-digit export growth over the past year. In addition, the Turkish government’s fiscal stimulus efforts appear to have helped spur faster economic growth and an improvement in the labor market. The unemployment rate was 10.2 percent in May, the most recent data available. Although still elevated, this is a marked improvement from the seven-year high of 13.0 percent reached in January 2017."

"The lira has stabilized against the dollar since the start of the year amid general greenback weakness. If this recent trend of gradual lira appreciation holds, as our currency strategy team anticipates, the inflationary pressures from the weak lira should begin to fade. Inflation expectations, which began to rise again late last year, have stabilized. The Central Bank of Turkey’s Monetary Policy Committee expects inflation to end 2017 at 8.7 percent before falling further to 6.4 percent in 2018. With decelerating prices and stronger economic growth, the central bank should have scope to gradually cut interest rates in the months ahead. "