Mark Bentley
Dec 20 2017

Turks not buying Erdoğan growth story

Turks are just not buying the government’s story that the economy is starting to flourish after a failed military coup in July last year.

Here in lies the predicament for President Recep Tayyip Erdoğan, who trumpeted 11.1 percent annual growth in the third quarter as proof of the country’s strength and increasing prosperity.

With elections due in 2019 at the latest, the reality for the government is that Turkish consumers are becoming more pessimistic about the future, in stark contrast to their counterparts in Europe and most major economies. While exporters are benefitting from a decline in the lira, consumers are being hit by a barrage of high inflation and interest rates that are curbing spending power.

Data for production and sales of motor vehicles, released this week, highlight the dual nature of the economic expansion.

Car sales are used as a bellwether for judging consumer sentiment and a nation’s propensity to spend. While manufacturers in Turkey produced more than 1 million cars in the first 11 months of this year – a record high – domestic sales have declined significantly. In November alone, they fell 21 percent annually, the biggest drop this year, data published this week showed. Sales for 2017 as a whole were down 4 percent.

Speaking to state-run Anatolian news agency on Tuesday, Nihat Zeybekçi, the nation’s economy minister, lauded the performance of the country’s industrialists, saying factory output and exports meant Turkey would probably exceed growth expectations for the final quarter.

But while industrial output for October – published on Dec. 8 – showed an annual increase of 7.3 percent from a year earlier, output of durable consumer goods fell 18.5 percent on a month-on-month basis. Production of capital goods such as machinery, which expanded 8.2 percent, was the main driver of monthly growth of 0.7 percent.

Data published by the Turkish Statistical Institute (TSK) on Nov. 22 showed growing pessimism among householders. The nation’s core measure of consumer confidence dropped for a fourth month in November to the lowest level this year. Financial well-being and employment topped their concerns.

The worsening outlook for consumers is in stark contrast to sentiment elsewhere. In Europe, Turkey’s main trading partner, consumers are becoming increasingly optimistic, according to a European Commission survey. The OECD’s index of confidence, spanning 35 major economies across the globe, has been rising since August last year. Confidence in Russia, the biggest rival to Turkey among European emerging markets, is at the highest level since 2014.

Consumer Confidence Index, OECD

Figures for November showed the TSK’s confidence index at 65.2, compared with 67.3 in September and 68.9 a year earlier. A figure below 100 indicates that people are pessimistic about their economic outlook and financial plans.

Unemployment of 10.6 percent in Turkey is higher than in any other OECD country aside from Spain, Italy, Greece and South Africa. Youth unemployment has edged up to 20 percent, the government’s statistics agency said last week.

Meanwhile, inflation of 13 percent is almost double that of Mexico, which has the second-highest rate of price increases in the OECD.

Inflation, OECD

Zeybekçi said he expects inflation to slow to single figures by April next year. Analysts, however, are not so optimistic. Ilhan Demir, an emerging markets economist at Nomura in London, expects that the rate will remain in double digits until November, before ending 2018 at 9.5 percent.

Higher inflation inevitably means that banks are forced to increase interest rates to maintain their profit margins. A call by Erdoğan for them to cut rates appears to have gone unheeded.

The cost of borrowing for short-term cash loans has reached an average of 19.3 percent, the highest level in almost six years, according to figures provided by Turkey Data Monitor.

And while the government has said that it may extend a scheme introduced earlier this year that provides credit guarantees for lending to cash-strapped companies – it has provided more than 200 billion lira in such guarantees in 2017 – loans to deposit ratios in the nation’s banking system are now so high – more than 125 percent – that banks have less room to lend to consumers without contravening capital limits set out in the Basel III international regulatory framework.