​Q1 GDP: Some signs of a painful transformation?

TURKEY - Report 31 May 2021 by Murat Ucer

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The Turkish economy grew by a higher than expected 7%, y/y, in the first quarter of 2021, and 1.7%, q/q (Graph 1). The information content of year-on-year data in terms of showing the true state of the economy is especially misleading nowadays, given the strong base effects from last year -- and this, of course, will even be more so in Q2-- but we nevertheless follow the convention by reporting them first, before turning to sequential (q/q) data.

So, growth was largely driven by domestic demand in Q1, in year-on-year terms, which appears to have made a 7.4 percentage point (pp) contribution to overall GDP growth, by our calculations (where we follow the IMF chain-weighted methodology). At 1.6 pps, the contribution of net foreign demand was also positive, on the back of 3.3% increase in exports and a modest decline in imports (1.1%). These were partly offset by an inventory drawdown, which shaved off about two pps from overall growth (Graph 2; Table 1). (Recall that the latter includes statistical error).

On the production side, all key sectors registered positive growth rates, with industry and agriculture leading the pack, at almost 12% and 7.5%, y/y (Graph 3; Table 2).

The sequential data, which, as noted, provides a more accurate picture on the state of the economy, offers somewhat of a different and arguably more interesting picture. On the expenditure side, investment rose by 1.6%, after a contraction of 2.7% in Q4, but household and public consumption expenditures both contracted by 1.7% and 2.1%, q/q, respectively (Graph 4). Net foreign demand appears to have been the main driver of growth, but it was thanks to a sharp fall in imports (9.1%), rather than an improvement in exports, which also fell (2.3%).

By contrast on the production side, most sectors registered positive growth rates, with growth in industry accelerating to 4% from 2.3% in the previous quarter, agriculture posting almost 3% growth after a slight contraction and the construction sector rebounding by 13.4%, after a sharp contraction (11.4%) during this period (Graph 5). After registering positive growth in the previous two quarters, the service sector contracted, albeit modestly (by 0.3%), likely reflecting the continuation of partial lockdown measures.

There are two “positive” features in the data. First, investment, i.e., gross fixed capital formation (GFCF) has been recovering, relatively speaking, driven by the machinery and equipment (M&E) component, likely reflecting the lagged effect from low rates/massive credit boost of last year. The latter appears to have surpassed its previous peak slightly as a percent of GDP, although the significant drop in construction investment more than offset it, lowering the GFCF as a whole (Graph 6). It is also worth highlighting, on a not so positive note, that the level of M&E investment is still very low (around 12%) with very little known about its details, i.e., public vs. private, net vs. gross (like whether firms are replacing existing machinery or adding to the capital stock), or its nature (like purchases of ‘commercial vehicles’ vs. new machines).

Second, there appears to have been some rebalancing from imports to domestic production, as well as from consumption to GFCF, which is one way of reconciling the two sides, i.e., a weak expenditure side (with declining consumption and collapsing imports), and a stronger production side, with most sectors (notably industry) growing. This also helps to explain – partly, of course-- why growth “has not been felt”. Aside from being extremely costly in terms of lost reserves and elevated inflation, which we all know too well by now, it was de facto driven by productivity gains, with GDP rising markedly faster than employment (Graph 7), and GFCF rather than consumption, and appears to have followed a "K-shaped" trajectory like elsewhere.

The bottom line is that Q1 GDP data seems to offer some signs of an economy undergoing painful transformation, the political sustainability of which, against a backdrop of the further weakness that we think is inevitable in H2, is highly questionable.