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Turkey is in Slumpflation – Mahfi Egilmez

Turkey is in Slumpflation – Mahfi Egilmez

Expected Outcome

It is now out there that Turkish economy contracted by 3% during the last quarter of 2018. Was that a surprise? No, as far as I’m concerned. I can even go further to say that when we consider the collapse in industrial production and the demand, this is a better number than I’d expect. In order to understand whether it was a surprise or not, let us look at some key data comparing the 4th quarters of 2017 and 2018:

CategoryChange %Description
Decrease in industrial production7.4Negative for growth / Decrease in production
Decrease in retail sales0.9Negative for growth / Decrease in demand
Fall in consumer confidence10.6Negative for growth / Decrease in demand
Increase in unemployment17.5Negative for economy / more unemployment = less demand.
Fall in confidence in economy19.5Negative expectations / Fall in investments, production &demand
Fall in Current Deficit86.1Positive for budget, negative for growth / Less investments
Fall in loan to deposit ratio2.5Positive for inflation, negative for growth / Fall in loans good for inflation, but slows down growth.
Increase in currency basket36.5Positive for exports and tourism, negative for debt and production / Increase in foreign exchange rates increases import prices, and lowers production and growth.
Increase in indicative interest60.5Negative for production and investment, positive for slowing down inflation and foreign exchange.
Increase in CB interest rates88.2Negative for banks’ resource costs and credit interest.
Increase in CDS Premiums126.3Increase in risk also increases the costs of foreign resource costs and is negative for production and growth.


With the numbers above, we couldn’t have hoped for a better number anyway.

On GDP and Per Capita Income

Turkey’s GDP in 2018 was TRY3,701 billion. If we convert this to US dollars at the mid-year exchange rate of 4.72, our 2018 GDP comes to USD784 billion. Our 2017 GDP in dollar terms was USD851 billion. That means it fell by USD67 billion. This takes Turkey down one step in world growth scale from being 17th to 18th, with the Netherlands eclipsing us.

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Turkey’s 2018 mid-year population is estimated to be 81.4 million. This makes our per capita income in US dollars USD9,632 (USD784 billion / 81.4 million). In 2017, the number was USD10,546. So, our per capita income actually fell by USD914 last year. Our world ranking in 2017 was 64th, we are now down to 71st.

Growth (Contraction)

As you can see from the table in this article, the economy which contracted by 3% in the final quarter of 2018, places the overall GDP growth in 2018 to 2.6%, which is way lower than the 5% estimations.

The most important factors in the change in GDP growth include the fall in household spending (-8.9%), and investment spending (-12.9%). The 24.4% fall in imports is another reflection of the fall in production. Most of our imports are used as raw materials, intermediary goods and investment products, a fall in Turkey’s imports generally mean a fall in production.

We can also see from the table that all the sectors have gone through a considerable degrowth (industrial, construction, finance, services, agriculture). The contraction in finance sector by 16.2% has also affected the real sector. There are two main reasons for this shrinking: 1) Financial sector has not extended credit to real sector who have a hard time paying off their debts, and 2) High interest rates and low demand is curbing the real sector’s need to acquire credit.

These negative factors that played an important role in the 4th quarter have all helped the overall 2018 GDP growth to come out at a low 2.6%.


We can say that Turkey, with the average inflation rate of 22.4% and a GDP contraction of 3% in the fourth quarter, have effectively entered slumpflation. Slumpflation is a term used to describe an economy in crisis with high inflation coupled with GDP contraction. This is actually the hardest type of economic crisis to step out of. You have to curb inflation while trying to stimulate growth. This is where macroeconomic targets are at odds with policy tools. Trying to curb inflation while going back to positive growth, and also trying to control unemployment which is prone to erupt in such situations, are contradicting targets.

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The chart below shows Turkey’s GDP vs inflation per quarter between 2016 and 2018.

2018 4th quarter is the section following the vertical dotted line. As you can see, starting from that point onwards, Turkey has entered a period of high inflation and negative growth. We can see a similar scenario having played out in the 3rd quarter of 2016. Turkey had successfully stepped out of that crisis relatively quickly in one quarter. It remains to be seen if we can replicate that this time.

GDP and Growth Analysis Table

(source: TSI


2018 4th Quarter2018 Annual
GDP (billion TRY)3,701
USD Average Exchange Rate4.72
GDP (billion USD)784
Mid-year population (million)81.4
Per capita income (USD)9,632
Growth (%)-3.02.6
  Household consumption change-8.91.1
  Government expenditures change0.53.6
  Increase in investments-12.9-1.7
  Increase in exports10.67.5
  Increase in imports-24.4-7.9
Growth by sector (%)
  Information Technology2.94.6
  Finance and Insurance-16.21.7
  Real Estate4.72.7
  Vocational and Administrative Support-10.2-2.6
  Public administration, Education, Health5.78.5
  Other services-2.62.6
  Taxes – Subsidies-8.10.0
Share in GDP (%)100.0
Expenditures as % of GDP100.0100.0
   Inventory Turnover-4.0-0.5
   Foreign Trade2.7-1.2
      Goods and services exports31.929.6
     Goods and services imports-29.2-30.8



Originally published in Turkish at:

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