Turkish economic growth slowest since coup as lira slides

Turkeys’ economy grew at the slowest annual pace in the second quarter since a military coup attempt in 2016 as a slide in the lira began to hit the construction industry and other sectors.

The economy expanded at an annual 5.2 percent in the three months to June, in line with economists’ expectations but less than the 7.3 percent pace of the previous quarter, data from the Turkish Statistical Institute showed on Monday. It was the lowest reading since the fourth quarter of 2016, when the economy grew 4.2 percent as it emerged from a contraction caused by the July military intervention.

The slowdown was led by construction, which grew 0.8 percent, and agriculture, which contracted 1.5 percent. Industry expanded 4.3 percent, government spending 7.2 percent and services 8 percent.

Turkey’s lira has slumped about 40 percent against the dollar this year, inlcuding 23 percent in the first half, on concern that the government’s policies were overheating the economy and leading to a hard landing. Since the second quarter, the slump in the currency has deepened partly because of a political crisis with the United States over the imprisonment of Americans, which has led to tit-for-tat economic sanctions.

Quarter-on-quarter economic growth was 0.9 percent in the three months to June. The rate of expansion was less than half of the first quarter’s 2 percent pace and the lowest since a contraction in the third quarter of 2016.

Economists are now expecting negative growth in Turkey that could start as early as the third quarter.

"All the action will be seen in the third quarter given the marked devaluation in the lira and the sudden stop to the economy seen since then," Tim Ash, senior emerging markets strategist at Blue Bay Asset Management in London, said in an e-mailed note to clients. "This print just underlines the story of an overheating economy going into the June elections."

Turkish President Recep Tayyip Erdogan won a second term in office in the June 24 polls. He has since tightened his grip over economic decision-making, raising the concern of investors and ratings agencies, who have downgraded Turkey's sovereign debt further into junk territory. In July, Erdogan hired his son-in-law Berat Albayrak to take charge of the economy. He also increased his control over the central bank by giving himself the sole power to hire its governor and deputies.

The lira fell 0.7 percent to 6.45 per dollar at 10:44 a.m. in Istanbul.