GDP contracts in the third quarter

Data revision confirms a technical recession: GDP shrank 0.2% on a seasonally adjusted quarter-on-quarter basis in Q3, matching Q2’s downwardly revised 0.2% contraction—the statistics office had previously reported a 0.1% expansion. As a result, the Turkish economy entered a technical recession in Q3. On an annual basis, economic growth slowed to 2.1% in Q3 from the previous period's 2.4% expansion, marking the softest growth since Q2 2020.

Weak domestic demand at root of contraction: Private consumption contracted 0.3% in Q3 (Q2: -0.1% qoq s.a.), marking the steepest decline since Q3 2023. Moreover, government spending dropped at the sharpest pace since Q4 2023, contracting 0.4% (Q2: +1.0% qoq s.a.). That said, fixed investment rebounded, growing 2.0% in Q3, contrasting the 3.2% decrease logged in the prior quarter. On the external front, exports of goods and services increased 3.6% on a seasonally adjusted quarterly basis in the third quarter, which contrasted with the second quarter's 3.6% contraction. Conversely, imports of goods and services deteriorated, contracting 1.6% in Q3 (Q2: +0.4% qoq s.a.).

Recovery to begin in Q1 2025: Our Consensus is for the economy to remain in the doldrums in Q4 as sky-high interest rates continue to dampen demand. Our panelists expect the economy to expand again from Q1 onwards, though growth should come in slightly below 2024’s projected level in 2025 as a whole due to softer expansions in both private and public spending. Rising tensions in the Middle East cloud the outlook, while the pace of monetary policy easing is a key factor to track.

Panelist insight: Clemens Grafe and Basak Edizgil, economists at Goldman Sachs, commented: “Overall, Q3 GDP is consistent with a gradual slowdown in domestic demand in sequential terms. But considering the annual growth rate, the slowdown appears to have been less severe than we had thought previously – possibly because fiscal policy has loosened in Q3. Given that our current activity indicator has accelerated in November, we think the uncertainty around the pace of the slowdown in domestic demand has risen, supporting our view that the TCMB will only start cutting rates gradually from January rather than in December” Meanwhile, ING’s Muhamment Mercan said: “We expect Turkey's economic activity to remain soft in the last quarter, given tighter financial conditions leading to ongoing normalisation in domestic demand – although some recent indicators, such as capacity utilisation, real sector confidence, retail and construction sector indices, showed a recovery in November. The Central Bank of Turkey's recent communication suggested that we are nearing a gradual rate-cutting cycle, implying a December move as a real possibility.”

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