People wait in line to buy vegetables sold in a tent set up by the municipality in the Bayrampasa district of Istanbul, Turkey Image Credit: Reuters

ISTANBUL: The Turkish economy contracted a sharper than expected 3 per cent in the fourth quarter of 2018, its worst performance in nearly a decade and a clear sign that last year’s currency crisis has tipped it into recession.

Turkey, a major emerging market once seen as a star performer by international investors, achieved growth of more than 7 per cent in 2017. But last year, it was battered by a 30 per cent slide in the value of the lira brought on by concerns over a US diplomatic spat and central bank independence.

The year-on-year quarterly contraction compared with a median forecast of a 2.7 per cent decline in a Reuters poll, and it was the worst performance since 2009. The lira initially eased slightly after the official GDP data was published, before recovering to 5.4260 against the dollar.

The economy grew 2.6 per cent in 2018 as a whole, also the weakest performance since 2009, data from the Turkish Statistical Institute showed. It compares with a forecast in the poll of 2.55 per cent growth.

Fourth quarter GDP shrank a seasonally and calendar-adjusted 2.4 per cent from the previous quarter. The data also showed the economy had expanded 1.8 per cent year-on-year in the third quarter, revised from a previously reported 1.6 per cent.

The economy slowed abruptly in the second half of last year due to the lira crisis, which was caused by a rift with Washington that led to US tariffs and sanctions, and worries over the central bank’s independence given pressure from President Tayyip Erdogan to cut borrowing costs.

Inflation peaked at a 15-year high of more than 25 per cent in October, and the central bank raised its key interest rate to 24 per cent in September.

The construction sector — long a beneficiary of Turkey’s credit-fuelled building boom — contracted 8.7 per cent year-on-year in the fourth quarter, the data showed, coupled with a 6.4 per cent industry sector contraction.

“My sense is the recession will be deeper and longer than previously (thought) given the balance sheet nature of this recession,” said Timothy Ash of BlueBay Asset Management. “Any unorthodox response (by the government, such as) early monetary policy easing at this stage will make things much worse.” Consumption expenditures of households decreased by around 9 per cent in the last quarter, showing signs of slowdown in domestic demand that has also sharply narrowed Turkey’s current account deficit. Separately on Monday, the country’s central bank said the deficit was $813 million in January.

In 2017 Turkey’s economy expanded 7.4 per cent, its strongest growth since 2013, driven by industry and construction. For 2018, the Reuters poll of 19 economists saw full-year forecasts range from economic growth of 1.8 per cent to 3.5 per cent.

The government, which in September cut its 2018 growth forecast to 3.8 per cent from 5.5 per cent, said improvement was around the corner.

“The worst is behind in terms of economic activity. The worst forecasts were not realised,” Turkish Finance Minister Berat Albayrak said on Twitter after the data was published.

He added the rebalancing process continues as expected despite the contraction, and predicted 2019 growth will be in line with the government’s forecast of 2.3 per cent.

The Turkish government has taken a series of measures in a bid to boost slowing domestic demand, such as tax cuts for some consumer products including vehicles, furniture and white goods.

— Reuters