Turkey’s credit-fuelled growth claims ring hollow thanks to base effect

Last Friday, as Turkey reeled from the news that dozens of its soldiers had been killed in an attack by Syrian government forces in Idlib province in northwest Syria, Turkish Treasury and Finance Minister Berat Albayrak shared an upbeat post on social media account lauding Turkey’s 0.9 percent economic growth in 2019.

Albayrak quickly deleted the post after public backlash over its timing. But it was not only tact that the minister’s message lacked: Figures released by Turkey’s statistical institute show that, far from the rosy picture Albayrak painted, Turkey’s economic growth had regressed to a level last seen in the 2008-2009 financial crisis.

The 6 percent GDP growth recorded in the last quarter of 2019 compared to the same period in 2018 was mainly the result of consumer spending fuelled by cheap credit after public banks mirrored the central bank by slashing interest rates.

That 6 percent growth – 0.9 percentage points higher than predicted – also brought the annual GDP growth to 0.3 points above the expected growth. 

But while that took Turkey’s GDP up to 4.28 trillion liras, in dollar terms the economy actually shrank by some $35 billion to $753.6 billion compared to 2018. 

The effect of the cheap credit on Turkey’s manufacturing sector has been obvious: the sector grew by 5.9 percent in the final quarter of 2019, reaching the highest rate of growth in two years and contributing 1.15 percentage points to broader economic growth. Credit, banking, finance and insurance experienced 24.2 percent growth during the same period and contributing some 0.79 points. 

This was ultimately thanks to the central bank’s measures slashing interest rates, which encouraged demand for both consumer and commercial credit.

The cheap credit was not, though, able to arrest the decline in Turkey’s construction sector, which shrank by 3.8 percent in 2019’s final quarter.

This was offset by a 6.8 percent increase in consumer spending fuelled by the rise in cheap credit, which contributed 3.9 percentage points to the final quarter’s growth. 

At the same time, the growth in manufacturing and consumer spending triggered a 29.3 percent rise in imports during that period. Exports, however, failed to keep the pace, rising by just 4.4 percent. This indicated that Turkey’s chronic current account deficit could be back with a vengeance in 2020, after a protracted period of surpluses recorded in 2019 as the country continued to suffer the effects of the previous year’s currency crisis. 

With interest rates for vehicle purchases, mortgages and consumer spending slashed, it is no surprise that these three areas fuelled growth in the final quarter. Thus, spending on durable consumer goods rose by 15.7 percent, while spending on nondurable goods rose by 17.6 percent. The service sector, which includes Turkey’s lucrative tourism industry, also experienced growth of 21.1 percent over that period.

All of this has been fuelled by the government’s attempts to stimulate the economy through back-to-back interest rate cuts that brought Turkey to a negative real rate this January, when the central bank slashed its policy rate by 75 basis points to 11.25 percent, bringing it below the 11.84 percent inflation rate recorded in December. With rates cut as low as possible, and government exemptions on VAT for products including white goods and furniture, there was a 6 percent rise in credit doled out by public banks in the last three months of 2019.

But despite all this, the 0.9 percent growth recorded last year is among the lowest rates in the Justice and Development Party’s 19-year reign. It is only a touch higher than the 0.8 percent growth in 2008, when the global financial crisis struck. The following year, Turkey’s economy shrank by 4.7 percent. 

This means that the government’s insistence that there is no cause for alarm about Turkey’s economy rings hollow. The government pulled out all the stops to achieve 0.9 percent growth last year, and still did not bring it far past crisis levels. This alone is tangible evidence that Turkey is currently going through a severe economic crisis.  

Similarly, Turkey’s per capita income has regressed to $9,127, below the $9,656 recorded in 2007 and a long way from the peak in 2013 of $12,480. 

Moreover, the 6 percent “explosion” in growth that Albayrak lauded was a loaded figure thanks to the base effect: The economy shrank by 2.8 percent during the same period of 2018 in the wake of the currency crisis.

That base effect is the hidden truth behind the minister’s upbeat news of economic growth that has seen Turkey’s per capita income reach lows last seen 12 years ago. 

Above all, it is a growth rate that has been achieved not through new investment, manufacturing or employment, but through cheap credit extended by public banks.