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Summary of Turkey Economic and Financial Outlook

Core Content

This report outlines the current economic and financial outlook for Turkey, highlighting a slowdown in growth and persistent inflationary pressures. It is prepared by the Strategist and Economist teams at BNPP and is intended for professional clients and relevant persons only. The analysis includes forecasts for GDP growth, inflation, and the current account deficit, as well as factors affecting economic activity and currency stability.

Main Points

Economic Slowdown

• The Turkish economy is expected to experience a slowdown, with private consumption and investment being hit by currency devaluation, high interest rates, and uncertainty.
• The GDP growth forecast for 2018 has been revised down to 4.5% from the previous 5.4%, and for 2019 to 4.0% from 4.3%.
• The pace of growth is expected to slow from 7.4% y/y in Q1 2018 to 6.2% for H1 and 3.1% for H2.
• Leading indicators suggest a decline in economic activity, with real money supply growth slowing and the manufacturing PMI dropping to 46.4 in May.
• Employment data shows a decline in new job creation, with a 12-month average dropping from 135,000 in December to 85,000 in March.

Inflationary Pressures

• Inflation remains high, with the CPI reaching 12.1% y/y in June 2018 and expected to rise to 14.3% in July.
• The report forecasts CPI to end 2018 at 12.5% (1.5pp above the previous forecast).
• Producer price inflation is at 20.2% y/y in May, indicating continued cost pressures that will likely be passed on to consumers.

Current Account Deficit

• The current account deficit is expected to remain elevated in 2018, reaching USD 60bn (7% of GDP), down from USD 66bn previously.
• The deficit is projected to narrow in 2019 to USD 50bn (5.5% of GDP), due to below-potential growth, weak domestic demand, and strong exports supported by the weak TRY.
• The non-energy and non-gold component of the current account deficit rose to USD 7.8bn in April, but no improvement has yet been seen in the data.

Currency Outlook

• The Turkish Lira (TRY) has weakened by 22% against a basket of USD and EUR since the start of the year.
• A recovery in the non-energy component of the current account deficit is seen as a potential first signal of optimism for the currency.
• The central bank has raised the average cost of funding by 500 basis points to contain inflation.

Key Information

• Consumer confidence has declined from 88.8 in March to 81 in June, reflecting uncertainty and economic concerns.
• Fiscal policy is expected to support growth, especially ahead of the March 2019 elections.
• Currency stability is crucial for controlling inflation, and the current account is a key indicator for predicting currency pressure.
• The report includes charts that illustrate trends in real money supply growth, GDP growth, electricity production, and the components of the current account deficit.

Legal and Regulatory Information

• This document is non-independent research and may be subject to conflicts of interest.
• It is a marketing communication and not intended for retail investors.
• The information is not investment research and should not be relied upon for investment decisions.
• The document is not a prospectus and does not constitute an offer to sell or purchase any financial instrument.
• It is intended for professional clients and eligible counterparties only.
• BNPP may have financial interests in the issuers or securities mentioned, and may engage in transactions inconsistent with the views expressed.
• The document may contain performance data based on back-testing, which is not indicative of future results.
• All estimates and opinions are subject to change without notice.

Summary Table

Conclusion

The Turkish economy is facing a slowdown driven by currency devaluation, high interest rates, and uncertainty. While fiscal support is expected to moderate the decline, inflation and the current account deficit remain significant challenges. The report emphasizes the importance of currency stability and the potential for recovery in the current account deficit as an indicator of future economic improvement.