Turkey economic growth contracts in Q3; current account deficit likely to widen in 2017

Gross domestic product (GDP) in Turkey contracted during the third quarter of this year, coming in well below what markets had initially anticipated, barring construction sector.

Turkey’s Q3 GDP data released yesterday printed -1.8 percent y/y, against consensus of 0.3 percent. This was well below expectations. A drill down into the data shows a contraction of activity across the board, with the exception of the construction industry.

"It is now clear that the attempted coup had a significant effect upon business sentiment and investment. This hardly bodes well for Q4 data nor indeed for 2017 do (we already hold a sub consensus 1.9 percent forecast for 2017). As if that wasn’t bad enough, reports suggested Saudi Arabia was considering further oil production cuts. That’s unequivocally bad news for the Turkish current account deficit, which we expect will widen towards 4.7 percent of GDP next year," Commerzbank commented in its latest research report.

There now exists a combination of deteriorating fundamentals in an environment of worsening sentiment towards EM, not to mention political instability in Turkey. In addition the central bank of Turkey (CBT) is reluctant to raise rates, coupled with all the ingredients for further lira weakness. This will get worse before it gets better.