Turkey's Gross domestic product (GDP) growth forecasts for the second quarter of 2019 were concentrated between -1.8% and -2%. No doubt among economists, some expected a 1% contraction; others a 2.5% contraction.
The Turkish Statistical Institute (TurkStat) announced the real growth in GDP in the second quarter was minus 1.5%. When the Istanbul Chamber of Industry Purchasing Managers' Index (PMI) index pointed to rise to 48 points in August, from 46.5 points in June and 46.7 points in July, the positive signals from the manufacturing gears were positively reflected in both market data and expectations.
With this picture, there is no doubt that in the Central Bank of the Republic of Turkey's (CBRT) Expectations Survey, which is created by asking questions to about 100 economists every month, the growth forecasts for end-2019 will be revised upward. Organizations that carry out analyses on macroeconomic data have already begun to share their views that the Turkish economy could close 2019 with positive growth of around 0.8%. Particularly, the expectation that the downward trend in annual inflation will continue reinforces the expectation that a further 3-point reduction decision might come out of the CBRT's Monetary Policy Committee meeting on Sept. 12.
Such a development will undoubtedly be an important step towards further improvement of investment costs for the real sector. In addition, export volume continuing to break records in goods and services will lead the real sector to increase capacity to benefit from these opportunities in a conjuncture where export of goods exceeds $182 billion and export of services export exceeds $52 billion. Thus, the recovery in machinery and equipment investments in the last quarter of the year should not be surprising. I expect that we will end 2019 with approximately 1.5% growth.
In the meantime, let's note that the 2.6% contraction in GDP growth in the first quarter was positively revised tp 2.4%. In addition, while GDP growth in the first quarter, which showed a 1.3% positive performance when compared to the previous quarter, was revised upwards to 1.6%. The 1.2% positive growth in the second quarter compared to the previous quarter indicates that the recovery in the economy has gained serious momentum. Thus, it will not be surprising if the economy attains 1%, even 1.5% GDP growth at the end of the year.
The dynamics of currency pricing
In the light of recent developments concerning the world and the Turkish economy, global investors are rapidly changing their view of Turkey because they have found important clues in the recently announced price index data. The first important clue is that the Producer Price Index, an indicator of cost inflation on an annualized basis, while even going up to 46% in September 2018, reaching one of the highest levels in history, fell below 14% as of last August. This 32-point improvement in cost inflation, a multilayered and comprehensive foreign policy based on the win-win principle with the U.S., Russia and China and measures implemented by the economic administration on monetary, financial and direct economic policies should all be noted.
This determined progress on the economic-political front in addition to the stability it bought to exchange rates with the decline in interest rates in domestic markets accelerated the softening and decline for cost inflation. As a matter of fact, the decline in cost inflation will continue to gain more speed in the coming months. This will, of course, have a positive impact on the consumer inflation side. Just a few months ago, while seasonal and cyclical adjusted consumer price index (CPI) rates and core inflation values were above headline inflation, the improvement in prices provide important clues for recovery and stability. In addition, since Turkey's second-quarter growth data gave better signals than expected, its exports continue to grow despite all the tensions in global trade and the recovery in its purchasing managers' index and real sector confidence index, it can be easily understood why foreign investors' view of Turkey has improved. The Turkish economy will enter 2020 in a much more dynamic way.