Economic Rebound in Turkey this Year Could Be Impacted by Domestic Macroeconomic Volatility and Evolving Global Uncertainties

Ankara: The World Bank issued today its latest edition of the Turkey Economic Monitor (TEM), which takes stock of recent economic developments and provides the World Bank’s analysis of economic prospects in Turkey.

Policy responses to the COVID-19 pandemic and its economic impact led to a sharp rebound in economic activity in the second half of 2020. Taking account of quasi-fiscal measures to support credit, Turkey’s stimulus program was larger as a share of GDP (gross domestic product) than the average of G20 emerging market countries.

A stimulus-induced credit boom and relaxation of restrictions on mobility and shop closures in June and July drove a sharp rebound in economic activity, making Turkey one of the few G20 countries with positive growth in 2020. But this growth came with rising inflation, falling international reserves, a weakening of the Lira, a sharply expanded current account deficit and increasing corporate stress.

While the recovery in late 2020 has helped labor markets recover somewhat, many have been left behind, especially women, youth and lower-skilled workers. This, in conjunction with high inflation is likely to have hurt the poor more. Poverty is estimated to have risen to 12.2% in 2020 from 10.2% in 2019. Bringing the poverty rate back to pre-pandemic levels presents a challenge.

Turkey and much of the rest of the world will struggle to shake off the pandemic this year. Annual growth in Turkey is, nevertheless, expected to be a respectable 5 percent this year, driven by export recovery – though from a low level.

However, as advanced economies, particularly the United States, show signs of a pick-up in inflation, intensification of market speculation about an end to very loose monetary policy in advanced economies (the US in particular) could cause destabilizing movements in global liquidity away from emerging markets. Risks of a resurgence of COVID-19 in some countries could also affect global recovery as well as Turkey’s growth prospects.

“The crisis offers an opportunity. Measures to incentivize a green recovery – and begin a green transformation – can keep Turkey at a competitive advantage as global markets decarbonize. A more diversified and greener financial system would support a resilient, sustained recovery,” said Auguste Kouame, World Bank Country Director for Turkey.

The report discusses policy priorities for containing economic imbalances, protecting people and promoting financial sector stability. A focus on enabling frameworks for financial institutions and firms to restore their balance sheets will be key to reducing risks and paving the way for future growth. There is room for the government budget to accommodate important, targeted support to firms and households to help ensure an inclusive recovery. Measures that increase international market access and increased participation in global value chains will enable Turkish firms to grow and become more productive.

“The shock to the labor market is likely to have long-lasting effects, and social assistance, as well as active and targeted labor market policies, will be increasingly important to ensure people, especially women and youth, can fulfil their potential,” noted David Knight, Acting Program Leader in the World Bank Turkey Office and team leader for the report.