The report starts with JP Morgan research team expressing its sorrow and well-wishes to the people of Turkey: “We convey our sympathies and best wishes to those who were affected by the earthquakes in Turkey and Syria. We know it is early and unpleasant at this stage, but we briefly touch upon the possible effects of the disaster on the Turkish economy in this note.
JP Morgan concurs with the majority of analyses on the subject that the economic contribution of the vast quake zone is modest, hence the damage to GDP, too, ought to be modest:
Given the low economic size of the worst-affected provinces, we estimate the impact of the earthquake on economic activity to be modest relative to geographic scale. We expect 1Q23 growth to be weaker than previously anticipated, as is already evident in daily electricity consumption and exports last week. That said, reconstruction should lead to a rebound in 2Q23 and into 2H23.
We changed our outlook for economic growth on a quarterly basis to reflect the relative weakness in 1Q23 and a rebound in 2Q23, while keeping our conservative growth forecast of 2.1% unchanged for this year.
An IMF paper suggests that a country with debt at 30% of GDP is likely to experience growth of 0.5 pp higher than a country with debt of 60% of GDP in the year of a large natural disaster. It also shows that the impact on growth and investment in the following year is positive due to reconstruction efforts. All in all, we think that the overall impact of the earthquake on the GDP growth will be negligible this time since Turkey has fiscal space to support the economy.
The inflation impact is less clear, and none was visible back in 1999 (Figure 2). Since the seasonal importance of the region in crop production is low, we do not expect a significant inflationary impact on vegetables, fruits and grain prices due to the earthquake. That said, we may see higher meat prices since the region is important for the livestock sector.
With higher food prices and increased fiscal stimulus, we revise up our year-end inflation forecast from 43% to 45%.
At the end, JP Morgan summarizes the “flow damage” to the economy as follows.
- 10 provinces affected by the earthquake make up 3% of Turkey’s GDP, 8.5% of exports, 5% of tax revenues and 11.1% of active employees.
- The three worst-affected provinces account for only 2.6% of Turkey’s GDP, 2.2% of exports, and 2.3% of tax revenues.
- Direct costs from the destruction of physical structures may reach 2.5% of GDP (or $25bn), with risks on the upside.
- We revise up our year-end inflation forecast from 43% to 45% due to expected higher food prices and increased fiscal stimulus.
- We expect 1Q23 growth to be weaker, but reconstruction should lead a rebound in 2Q23 and into 2H23.
- We expect a government budget deficit of 4.5% of GDP (previously 3.5% of GDP) this year
- We anticipate a wider current account deficit of 3% of GDP, but international aid should compensate the pressure on the currency.
- Expansionary fiscal and credit policies should mitigate the impact of the earthquake in the near term.
Excerpt only from the similarly-titled JP Morgan research note