Macro View: Economic activity remains buoyant with pulled-forward domestic demand

1Q22 GDP growth reaches 7.3%, in line with expectations. TurkStat announced that 1Q22 GDP growth reached 7.3%, in line with the 7.2% median market expectation, which is also our estimate.  The working-day and seasonally adjusted GDP pointed to a 1.2% QoQ improvement (on top of the 2.2%, 1.7%, 2.8% and 1.5% sequential recovery witnessed in 2021). With this, 4Q trailing GDP growth has also remained almost flat at 10.9% (11.0% in 2021).

GDP growth was mainly driven by domestic demand, while net exports also made a respectable contribution.  1Q22 GDP growth is mainly driven by stellar private consumption growth of 19.5% YoY, making a 12.2% contribution to overall GDP growth. We consider that this is mainly driven by pulled-forward demand amidst the high inflationary environment. That said, the contribution of net exports was also respectable at 3.5%, particularly led by some 16.8% YoY export growth. Yet, there was a mere 1.1% YoY growth in investments, largely attributable to the 9.8% YoY contraction in construction related investments, while machinery-equipment investments increased by 10.5% YoY.  As a result, investments made only a 0.3% contribution to overall GDP growth. Public spending was also weak at 0.9% YoY, making a negligible 0.1% contribution. These also mean that depletion of inventories erased about 8.6% from GDP growth in 4Q. Note that inventories have been consistently pulling down GDP growth over the past six quarters (e.g.: -7.0% in 4Q21, -5.0% in 3Q21, -4.6% in 2Q21). Therefore, we may conclude that inventories will need to be restored going forward with much higher costs.

Industrial and most services sectors remain buoyant, while the construction sector continues to suffer. From the production front, the 7.4% YoY growth in the industrial sector and the 14.9% YoY growth in the services (trade, transportation and tourism) sector were the major drivers coupled with the strong performance in other services sectors, such as information sector (16.8% YoY), financial services sector (24.2% YoY) and administrative services sector (8.9%). Yet, construction sector continued to suffer with a 7.2% YoY contraction, while agricultural sector growth was only 0.9% YoY.

Despite the support of pulled-forward domestic demand so far, we may witness a sharper slowdown in 2H22. In sum, in addition to the robust export performance, we observe that domestic demand is being pulled forward with the expectation that prices will increase continuously, which ensures that economic activity remains buoyant as of 1Q22. In the coming period, the expected slowdown in the global economy, particularly in Europe, which is Turkey’s main export market, may adversely affect the export performance. On the other hand, possible wage adjustments due to the depreciation of TL and the rise in inflation may support domestic demand and limit the slowdown in economic activity. In any case, we believe that some slowdown in domestic demand is still highly likely, in parallel with the ongoing rise in inflation. On the other hand, upon the expected issuance of the inflation-indexed bill/bond product in order to limit the depreciation in TL, we may also witness some upward pressure on market interest rates over time. This may cause a sharper slowdown in economic activity in the coming months. As such, in our basecase macro scenario, in which the depreciation pressure in TL is somewhat constrained at the expense of some increase in market interest rates with the issuance of inflation indexed bond, we expect 2022 GDP growth at 2.5% (or slightly higher), due to the expected slowdown particularly in 2H22.



Gedik Investment Research