Turkey probably contained the damage from the coronavirus pandemic last quarter with a campaign of stimulus that came at the cost of destabilizing the lira.
The $750 billion economy likely fared better than many of its peers, thanks in part to a combination of interest-rate cuts, fiscal spending and a government-sponsored credit push. Data on Monday will show gross domestic product shrank 10.7% from a year earlier, according to the median of 17 forecasts in a Bloomberg survey.
The severity of the shock will be more evident in seasonally and working day-adjusted figures due the same day, with the median estimate from analysts calling for a decline of 13.6% in the second quarter from the previous three months — which would be the steepest contraction in data going back to 1998.
|What Bloomberg’s Economists Say…|
“The outbreak of Covid-19 and the associated lockdown measures delivered an economic blow that was partially softened by an increase in credit provision. The cost was a destabilization of the currency, forcing the central bank to effectively hike interest rates this month.”
— Ziad Daoud
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To help businesses and consumers ride out the the pandemic, the Turkish government unveiled a 240 billion-lira ($32.7 billion) stimulus package while state banks ramped up lending. Meantime, the central bank injected liquidity by scooping up government bonds and delivered a series of rate cuts including an emergency decrease of a full percentage point in March.
Restrictions imposed by Turkey to stop the contagion from March were more stringent than in the rest of central and eastern Europe, the Middle East and North Africa, which probably translated into a “pronounced downturn” in the second quarter, according to Goldman Sachs Group Inc.
“Full lockdown over weekends and national holidays in April and May likely acted as a significant drag on economic activity,” Goldman economists led by Kevin Daly said in a report to clients.
An economic turnaround started to take hold as lockdown measures began to ease toward the end of the second quarter. Industrial production grew in June for the first time since February and economic confidence improved for four straight months through August.
But the drawbacks of the government’s efforts to juice up the economy have also become more obvious.
Inflationary pressures have reemerged alongside another wave of lira depreciation, prompting the central bank to increase the cost of funding through stealth tightening but without resorting to an outright rate hike. Turkey’s currency has depreciated about 19% against the dollar this year and is the worst performer in emerging markets in the third quarter.
The stimulus campaign may not save the economy from one of the steepest full-year contractions in history, with the International Monetary Fund predicting it could slump 5%. Treasury and Finance Minister Berat Albayrak is more optimistic, estimating this year’s performance at between minus 2% to a 1% gain.
|Forecaster||Turkey 2020 GDP Growth Forecast|
|The International Monetary Fund||-5%|
|Bloomberg August Survey of Economists||-4%|
|European Bank for Reconstruction and Development||-3.5%|
|S&P Global Ratings||-3.3%|
|Turkish Central Bank Survey of Expectations||-1.6%|
“Leading indicators confirm that the economy is in the phase of recovery from its bottom point,” said Enver Erkan, an economist at Tera Securities in Istanbul.
— With assistance by Abeer Abu Omar, and Harumi Ichikura
(Updates with economist comment in sixth paragraph)