July so Strong Growth Despite Unfavorable Developments

According to the initial estimates of GeoStat, the real GDP growth strengthened to 6.1% YoY in July 2019. The growth averaged to 5.1% YoY in the first seven months of the year.

In terms of sectors, construction, manufacturing, trade, real estate and other services were the predominant drivers of the higher economic activity, while the decline was registered in mining and utilities sectors’.

Recovery of the construction sector was primarily supported by the sharp expansion of the public infrastructure investments (see note on fiscal) as well as the disappearing negative base effect of the South Caucasus Pipeline Extension Project. Also, the residential construction sector growth appears to be positive likely related to the increased construction permits during previous months as well as in July. While the mortgage growth rates have moderated, those are probably still acceptable for many developers coupled with some contribution of the internal installments.  

According to the GeoStat, a stronger construction activity was also supportive to the growth in manufacturing and trade sectors as production and trade with construction materials increased markedly. At the same time, the lower exports of ferro-alloys and the decline in electricity consumption negatively affected the growth in mining and utilities sectors.

Growth of inflows weakened in July being affected by the tourism shock, however, a strong growth in exports of goods and moderately increasing remittances were supportive (see notes on tourism, trade and remittances). In addition, lower oil prices had a positive contribution. Unlike previous months, imports of durable consumer goods somewhat strengthened, possibly indicating some recovery in household consumption. As for the credit, the overall growth was considerably supportive (see note on credit).

While the recent growth performance has been strong, indicating to healthy fundamentals and the resilience of the economy, July’s 6.1% increase was also supported by the low base effect as the Q3 2018 economic performance weakened reflecting the recession in Turkey, tighter fiscal stance and negative contribution of the finalization of the South Caucasus Pipeline Extension Project. If around 6% annual growth continues also in August and September, this would imply flat seasonally adjusted quarterly growth in Q3 2019. At the same time, annualized seasonally adjusted quarterly growth rates in the first half 2019 were high at 6.7%. Even if Q2 growth figures are revised downwards due to re-estimated tourism inflows in the second quarter (see July monthly update), still first half 2019 annualized growth should be above 5%. Overall, above 4% growth in 2019 should be seen as a reasonable projection with higher annual growth rates in the 3rd quarter compared to the end of the year, when the base effect will lower the annual growth rate.

TBC Research