Turkey’s economy grew a robust 4.5% y/y in Q1 as it continued to recover from the 2018 FX crisis. Q1 GDP missed expectations, however, as the business cycle appears to have turned in Q1, after growth accelerated to 6% y/y in Q4-2019. While industrial activity growth accelerated in Q1 (noteworthy because some manufacturers had already started to halt production in the second half of March), services sector growth was weaker than we had envisaged as the economic impact of the coronavirus may have kicked in before the restriction measures came into effect. We lower our 2020 real GDP growth forecast to -2.0% (-1.4% prior) to factor this in.
We expect Q2 GDP to contract by c.17% y/y
[Given] restrictions to contain the spread of the virus. However, this may not translate into disinflation yet. We think food inflation is set to mask the disinflationary impact of softer demand and lower energy prices. Indeed, despite a decline in imports and electricity consumption of c.30% and 17% y/y, respectively, in May, we expect the CPI to have remained in double digits (data showed annual CPI rose to 11.36% in May, editor’s note) likely slowing to single digits by H2.
This should create room for the central bank to continue easing monetary policy, following 1,575bps of rate cuts since July 2016. The ongoing rally in Turkish equities – likely supported by looser financial conditions – appears to reflect market expectations of positive GDP growth in H2-2020.
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