Ankara: Turkey’s economy fared better than forecast in the second quarter but growth will likely fall far short of the government’s expectations for the full year.

Gross domestic product expanded a seasonally adjusted 1.2 per cent from the previous three months, according to data released on Monday, down from a revised 1.6 per cent in the first quarter and better than the median estimate of 0.4 per cent in a Bloomberg survey. From a year earlier, GDP shrank 1.5 per cent.

While the risk of a double-dip recession is receding, the government’s 2.3 per cent target for 2019 may be out of reach. Still, Treasury and Finance Minister Berat Albayrak has said that he expects Turkey to post positive growth for the year. The focus is now shifting to monetary easing following a record cut in interest rates by the central bank in July.

“Given the lag in the monetary transmission mechanism and a lack of robust external flows, full-year growth still looks set to undershoot the government’s estimate by some margin,” said Kubilay Ozturk, an economist at Deutsche Bank AG. Still, the second-quarter performance “looks set to defy expectations for a deep full-year recession expectations for the Turkish economy.”

The lira extended gains after the data before paring its advance. It was trading 0.4 per cent stronger against the dollar as of 12.18pm in Istanbul.

Investment slump

The slowdown in quarterly growth was driven by a slump in investments, which shrank 7.4 per cent from the previous three months, according to a breakdown of GDP data by Turkstat.

On an annual basis, business spending on machinery fell 22.8 per cent, the biggest drop since at least 2016. Another factor that contributed to the annual contraction was consumer spending, which shrank 1.1 per cent.

Government spending, usually a big driver of GDP growth, rose 3.3 per cent from year earlier while exports rose 8.1 per cent. The median estimate in a Bloomberg survey of economists sees the economy shrinking 1.5 per cent in 2019, the first contraction since 2009.

“The deepening decline in fixed investments is a worry, particularly given negative repercussions for the supply side of the economy in the coming years,” Ozturk said.

Turkey exited its first recession in a decade in the first quarter, but the economy has struggled to keep up momentum as the prospect of punitive US sanctions dented consumer and business confidence. President Recep Tayyip Erdogan’s ruling AK Party refusing to concede defeat in the race for Istanbul mayor in March compounded the negative sentiment.

Foreign investors who balked at the risks pulled their money out and households started hoarding dollars. Meanwhile, the lira suffered the biggest drop in emerging markets in the second quarter, giving way to an outsize drawdown of the central bank’s limited reserves.

The lira has since stabilised and policymakers have started easing access to liquidity — central bank Governor Murat Uysal slashed the benchmark rate by 425 basis points in July, undoing some of the monetary tightening designed to backstop the currency.

But continued growth now hinges on banks’ ability to extend credit.

On an annualised basis and adjusted for foreign-currency fluctuations, credit expansion is hovering below 5 per cent after briefly touching 20 per cent in April. This comes despite a more than 10 percentage point drop in lira loan rates and government measures designed to prop up lending. Meanwhile, consumer confidence is hovering near a five-year low, and leading indicators such as industrial production point to further pain.