Turkish GDP Growth Surprises to the Upside in Q2 2015

The stronger-than-expected outturn in GDP growth in the second quarter was driven entirely by domestic spending. That said, the country still has a host of problems to confront.

GDP Growth Driven by Domestic Spending in Q2 

Data released this morning showed that real GDP in Turkey grew 1.3 percent (not annualized) in Q2 2015 relative to the previous quarter. The stronger-than-expected rise in real GDP on a sequential basis was enough to lift the year-over-year growth rate to 3.8 percent in Q2 from the 2.5 percent rate that was registered in Q1 (top chart). 

The outturn was even better than meets the eye because growth in the second quarter was driven entirely by domestic spending. Specifically, growth in real personal consumption expenditures strengthened to 5.6 percent from 4.6 percent, while fixed investment growth spending rose sharply to 9.7 percent from 0.4 percent. The modest drop in exports, which fell 2.1 percent, coupled with the 1.6 percent rise in imports caused net exports to slice 1.1 percentage points off of the overall GDP growth rate in the second quarter. Weakness in Turkey’s exports reflects sluggish economic growth in some of its major trading partners. 


Despite the stronger-than-expected GDP growth rate in Q2, Turkey is a long way from the supercharged growth rates that the economy racked up prior to the global recession and few analysts see a return to those growth rates anytime soon. Moreover, the country has a host of problems that are reflected in the nosedive in its currency. As shown in the middle chart, the Turkish lira has plunged roughly 40 percent vis-à-vis the U.S. dollar over the past two years or so with the trend accelerating this year. 

Of course, most emerging currencies have come under downward pressure in recent months. However, the lira’s problems are more extensive than simple contagion from other emerging currencies. For starters, the country’s current account deficit, although not as large as a few years ago, is still running on the order of 6 percent or so of GDP. When investors turn risk averse, the currencies of countries with large current account deficits often experience the most extreme selling pressure. 

Then there is the political uncertainty that exists in Turkey. The ruling AKP party lost its parliamentary majority in the general election in June, and it has subsequently been unsuccessful in forming a governing coalition. Although growth in fixed investment spending was strong in the second quarter, political uncertainty is usually not a recipe for robust investment spending. In addition, inflation, which is currently running around 7 percent, is above the central bank’s target of 5 percent. This above-target inflation rate is preventing the central bank from cutting its policy rates further, which would help to stimulate the economy. The good news is that GDP growth was stronger than expected in Q2. The bad news is that Turkey still has a long way to go before it is back to “normal.”