Mark Bentley
Dec 11 2018

Turkey slides into recession in challenge to Erdoğan

Turkey is almost certainly experiencing its first economic recession in almost a decade, posing a significant challenge to President Recep Tayyip Erdoğan as he seeks to solidify his power base at local elections in March.

The economy contracted by a quarterly 1.1 percent in the three months to September as private consumption and investment slumped, according to official figures published on Monday. A worsening in consumer confidence, manufacturing output and other key measures for October and November strongly suggest that economic activity will dip in the fourth quarter as well, heralding a full-blown recession.   

The March 31 elections will be the first major test of Erdoğan’s popularity since he won vast new executive powers at a general election in June. His governing Justice and Development Party (AKP) is seeking to retain key mayoral seats in Istanbul, Ankara and other large cities at the nationwide poll.

The loss of Turkey’s major cities to the opposition would constitute a painful political blow to Erdoğan, himself a former mayor of Istanbul, as he works to convince a divided electorate of the merits of Turkey’s new executive presidential system of government.

The third-quarter contraction means the size of Turkey’s economy has shrunk to $883 billion, the smallest in seven years. That reduces the country’s global ranking to 18th place from 17th in 2017. In terms of GDP per capital, Turkey ranks 68th, according to the Statistics Times.

A second successive quarter of negative economic growth would be the first since the aftermath of the 2009 global financial crisis and the first homegrown recession of Erdoğan’s 15-year reign. At the heart of the downturn is the construction industry, a sector which had blossomed on cheap foreign loans in recent years, borrowing that has now turned into an expensive liability after the lira slumped. Many of Erdoğan’s closest business allies are active in the industry.

The negative political consequences of a recession in Turkey have also become more personalised for Erdoğan because he has hired his son-in-law, Berat Albayrak, to steer the economy. Erdoğan merged the Treasury and Finance Ministry in July and appointed Albayrak to head the new institution. Since mid-September, he and Albayrak have also run the nation’s sovereign wealth fund, made up of the assets of Turkey’s largest state-owned enterprises, away from parliamentary oversight.

Berat Albayrak
Berat Albayrak presenting the government's economic programme back in September

On Monday, Albayrak sought to portray Turkey’s economic downturn as part of a wider trend in the global economy. The international outlook remains challenging, Albayrak said.

In recent years, Turkey made full use of a flood of cheap foreign money created by monetary easing from the Federal Reserve and European Central Bank to fund an expansion rivalling that of China. But the country is now a laggard when it comes to economic performance.

In a report last month, the 36-member Organisation for Economic Cooperation and Development (OECD), which comprises the world’s largest economies, published a report that underlined the country’s outlier status. Turkey was expected to contract 0.5 percent next year while overall growth among OECD economies was seen at 3.7 percent, the OECD said. The other underperformer would be crisis-hit Argentina, now following an IMF rescue programme, it said.

Ratings agency Moody’s is predicting a contraction next year of 2 percent, including a full-blown recession lasting until June. Fitch and the IMF are predicting economic growth of less than 1 percent, slashing previous forecasts.

Nomura Inc., a Japanese bank, said on Monday that it expected Turkey’s economy to shrink by a quarterly 2.5 percent in the final three months of this year and by 2.8 percent in 2019. The economy probably won’t start recovering until the fourth quarter of next year, it said.

Turkey’s projections for economic growth for this year and next look optimistic in comparison. In its economic programme published in September, the government forecast an expansion of 2.3 percent for 2019. Albayrak stood by that prediction this week, reiterating that the economy was going through a “rebalancing” rather than hard landing.

It is questionable whether Turks are believing the government’s rhetoric. It also asserts that the currency crisis was a plot against the country hatched in foreign capitals.

Erdoğan's approval rating has dipped below 40 percent for the first time in three and a half years, according to a nationwide survey by Ankara-based polling company Metropoll published last month. Some 39.8 percent of Turks approved of the president's performance, while 46.2 percent disapproved. The last time Erdoğan's ratings dipped below 40 percent was June 2015, when his party lost its legislative majority in parliament at a general election.

The Turkish president has turned to the Nationalist Action Party (MHP), his political ally in parliament, to bolster his party’s chances in the March elections. The MHP has agreed to not field competing candidates in the race for key city seats including Istanbul, Izmir and Ankara.

Further signs that the economy is entering a painful recession came on Tuesday, when the central bank reported that the current account, the widest measure of inflows and outflows of goods and services, posted a record surplus of $2.77 billion for October. It was the third-straight month of surpluses.

In times of high growth, Turkey’s economy usually posts large current account deficits, fuelled by demand for televisions and other medium and high-tech products that it can’t produce in sufficient numbers locally. The country also imports nearly all the oil it consumes.

The deficit, which is usually funded by inflows of foreign capital when investor confidence is high, had equated to about 6.5 percent of gross domestic product just as the currency crisis struck. It now stands at 4.5 percent of GDP and is shrinking fast.

Consumer confidence is also at levels unseen since the global financial crisis, government surveys show. It stood at 59.6 in November, edging up from October’s 57.3, but down from a 2018 peak of 73.1. Any reading below 100 indicates pessimism about the future.