A boy jumps into Bosphorus to cool off in Istanbul, Turkey August 20, 2018.

Reuters/Murad Sezer





Turkey's economy has most likely dived into a "steep" recession after the lira's recent plunge, according to Capital Economics' Jason Tuvey.

The Turkish economy was in a weak state even prior to the most recent collapse in the currency, he added.

Tuvey expects the Turkish economy to contract as much as 4% year-on-year in the final quarter of 2018.

"Overall, there’s no getting away from the fact that the Turkish economy is experiencing a deep downturn."

Turkey's ailing economy has most likely plunged into a recession over the last month thanks to the rising crisis with the nation's currency, and a fragile banking sector, according to new research from Capital Economics.

On Wednesday, Jason Tuvey, a senior emerging markets economist at the research house told clients in a note titled "Turkey entering a steep recession" that data coming out of the country is indicating pretty clearly that a recession has arrived, and that it will be officially confirmed by the end of the year.

"The latest Turkish activity data suggest that the plunge in the lira since May, and the associated sharp tightening of financial conditions, has tipped the economy into recession," he wrote.

While the lira has been falling since May, issues in Turkey first came to mainstream attention when the lira's slump intensified after the Trump administration placed a series of sanctions against Turkey in retaliation for its refusal to release Andrew Brunson.

Brunson is an American pastor detained by Turkish authorities for his alleged support for the outlawed Kurdistan Workers Party and the Gulenist movement, both of which are accused of being involved in 2016's failed coup against President Erdogan.

A falling currency tends to mean rising inflation as the cost of imports increase, and that is just what has happened in Turkey. Even prior to the lira's second collapse after US sanctions, inflation had already hit a 15-year high in July — close to 16%.

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"The latest signs show that higher inflation, coupled with a severe tightening of financial conditions, is filtering through into an abrupt slowdown in economic growth," Tuvey wrote.

"Hard activity data paint a grim picture of the economy even before the lira’s leg down this month," he continued, pointing to industrial production data from the second quarter, which show a contraction of 0.7% compared to 1.8% growth in the first quarter, as the chart below illustrates:

Screen Shot 2018 08 29 at 14.21.03

Capital Economics

Added to slowing production numbers, confidence across the economy is tumbling. "Confidence in the construction, retail and services sector has plumbed record low," Tuvey wrote, pointing in particular to the Turksat Economic Confidence Index, which this month gave its worst reading since 2009. Based on past form, Tuvey said, the data is "consistent with the economy contracting by around 3% year on year."

Here's the chart:

Screen Shot 2018 08 29 at 14.24.59

Capital Economics

Thanks to a strong start to 2018, Turkey's economy is likely to grow at a solid pace over the course of the year, but in the second half, a recession has clearly taken hold, Tuvey concluded.

"The economy is likely to contract by 2-4% y/y in Q4 of this year and in the first half of 2019. Our forecasts for stagnation in 2019 and growth of 3.5% in 2020 lie towards the bottom of the consensus," he wrote.

"Overall, there’s no getting away from the fact that the Turkish economy is experiencing a deep downturn."

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