New EBRD forecast sees Turkey’s recovery gathering pace

By Olga Rosca

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  • EBRD lifts its 2021 growth forecast for Turkey to 5.5 per cent from 5 per cent
  • Risks include a slower-than-expected return of tourism and interruptions to vaccination
  • Potential headwinds from household finances, inflation and geopolitical developments

With expected gross domestic product (GDP) growth of 5.5 per cent in 2021 and 4 per cent in 2022, Turkey’s economic recovery is gathering pace following the Covid-19 pandemic, the European Bank for Reconstruction and Development (EBRD) says in its latest Regional Economic Prospects report, published today.

Turkey’s economic growth is driven by exports, while domestic demand remains constrained by the impact of continuing containment measures and the weaker financial situation of households.

Like most countries, the Turkish authorities implemented significant policy loosening in response to Covid-19. In line with their response to previous crises, however, the authorities leaned particularly heavily on monetary loosening and credit expansion. This allowed Turkey to achieve GDP growth of 1.8 per cent in 2020, making it the only G20 country other than China to record positive growth last year.

However, this growth came at a cost in terms of macroeconomic and financial stability, most notably a significant depletion of reserves in an attempt to support the lira ‒ a serious concern given the country’s extensive external liabilities. Inflation remains high, partly due to the pass through of lira depreciation in 2020.

Roger Kelly, EBRD Lead Regional Economist, commented: “In terms of activity, the strong momentum in the second half of 2020 carried over into the first quarter of 2021, with year-on-year growth of 7.0 per cent being recorded. However, high-frequency indicators suggest that the recovery started to lose pace in the second quarter. Growth will be driven by exports, with domestic demand being constrained by the weaker financial situation of households and the impact of ongoing containment measures.”

He added: “There are a number of risks to the forecast, including a slower-than-expected return of tourism and interruptions to vaccination programmes in Turkey, possibly requiring further containment of activities. Other potential headwinds include a further tightening of domestic financial conditions, the return of inflation in advanced economies and adverse geopolitical developments.”

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