Turkish economy shrinks again as currency crisis bites

Turkish lira

The Turkish economy shrank sharply year on year for the second straight quarter in early 2019, laying bare the impact of a punishing currency crisis and soaring inflation and interest rates against a tense political backdrop.

The major emerging market economy contracted 2.6% in the first quarter after a 3% percent decline in the previous three months, rocked by a fall of more than a third in the value of the lira since the end of 2017.

A burst of government spending before local elections on March 31 helped contain the slump, though a subsequent further selloff in the lira and worsening sentiment could drag on gross domestic product (GDP) again toward the middle of 2019.

“The tightening of financial conditions over the past couple of months has probably resulted in a renewed downturn,” said Capital Economics senior EM economist Jason Tuvey, pointing to a broad market sell-off since late March.

“This reinforces our view that the recovery will be slow and bumpy.”

Last year’s currency crisis, brought on by concerns over a diplomatic row with Washington and doubts about the independence of the central bank, ended years of a construction-fuelled boom driven by cheap foreign capital and characterised by growth rates above 5 percent.

Inflation shot up as the central bank hiked borrowing costs to support the ailing lira.

The lira has come under renewed pressure in recent months as investors fretted about the threat of new U.S. sanctions, uncertainty over local election results, declining central bank reserves and a trend of Turks ramping up foreign holdings.

The lira firmed to 5.85 against the dollar from 5.8825 after Friday’s Statistical Institute data, which compared with a Reuters poll forecast for a first quarter shrinkage of 2.5%