Turkey’s economy grew by 1.8% in 2020, avoiding COVID contraction

Turkey’s economy grew 5.9 percent in the fourth quarter and 1.8 percent in 2020 as a whole, emerging as one of only a few globally to avoid a contraction due to the coronavirus pandemic, annual data showed on Monday.

Propelled by a burst of credit in mid-2020, fourth-quarter gross domestic product (GDP) grew 1.7 percent from the previous quarter on a seasonally and calendar-adjusted basis, the Turkish Statistical Institute said.

A surge in GDP growth in the second half of the year that surpassed Turkey’s potential rate was driven by a near doubling of lending by state banks to face down the initial wave of the virus.

While outperforming all emerging market (EM) and Group of 20 (G20) peers except China, Turkey’s growth came at a price: The cheap lending accelerated a record drop in the lira, drew down the country’s foreign currency reserves and helped push inflation to 15 percent. Also, few jobs were created.

The recovery was “unbalanced and ultimately exacerbated some of the country’s external vulnerabilities,” said Jason Tuvey, senior EM economist at Capital Economics.

Financial sector activity surged more than 21 percent last year, driving overall growth, the data showed. Tourism and other services activity dropped by 4.3 percent and the construction sector, an engine of growth in years past, shrank 3.5 percent.

The lira firmed to 7.351 against the dollar after the GDP data and was one percent stronger on the day.

The volatile currency tumbled last week after a rally that began in early November when Turkish President Recep Tayyip Erdogan promised a new market-friendly economic era. A new central bank chief has since hiked interest rates, cutting credit dramatically.

Finance Minister Lutfi Elvan, appointed in November, said on Twitter Monday that Turkey would prioritise price stability this year. Analysts say the economy should expand by roughly 5 percent in 2021 despite tight monetary policy.

In a Reuters news agency poll, GDP was forecast to have expanded 7.1 percent year-on-year in the fourth quarter of 2020, despite new curfews and curbs on the service sector to address a second COVID-19 wave, and 2.3 percent for the whole year.

World economies mostly contracted and tumbled into recessions last year, with emerging and developing nations shrinking by some 2.4 percent, according to the International Monetary Fund.

The major EM economy has cooled in recent years from an average 5 percent growth rate in the last two decades. The rate plunged by 10.3 percent annually in the second quarter as the pandemic hit, but rebounded sharply by 6.3 percent in the third.

Ankara is considering lifting some of the latest virus restrictions as of this month.

Tuvey of Capital Economics said the shift in November to more orthodox policies helped Turkey avoid “a full-blown balance of payments crisis”, and he predicted a sustained recovery may not come until the second half of this year.