Shoppers at a market in Istanbul. Turkey's economy likely rebounded sharply in the second quarter to grow at a record pace after contracting at the height of the COVID pandemic. Image Credit: Bloomberg

Istanbul: Turkey's economy likely rebounded sharply in the second quarter to grow at a record pace after contracting at the height of the Covid pandemic.

Data on Wednesday will show gross domestic product rose 21% from a year earlier and 1% from the first quarter, according to the median forecasts in Bloomberg surveys. Treasury and Finance Minister Lutfi Elvan said in June that the annual growth rate could surpass 20%, which would mark the highest level in data that goes back to 1999.

The $729 billion economy is expected to have outperformed most Group of 20 nations after shrinking 10.3% a year ago when the coronavirus pandemic struck. Last year, the government limited the impact of the pandemic on growth using a combination of interest-rate cuts and government-sponsored credit stimulus that bolstered consumption but came at the cost of lira depreciation and runaway inflation.

"The growth is currently being driven by industrial production and credits amid strong internal and external demand," said Can Ayan, an Istanbul-based economist at Aktifbank, who ranks second among forecasters of Turkish GDP data. Economic activity continued to grow in the third quarter and this could limit the expected deceleration in inflation, he said.

Activity picks up

Leading indicators show economic activity improving, particularly toward the end of the second quarter, as the government eased a strict nationwide lockdown imposed throughout May following a surge in Covid-19 cases. The economic confidence index published by the statistics institute in Ankara jumped to 97.8 in June from 92.6 the previous month. The gauge has been above 100 in the third quarter, indicating an optimistic outlook. Industrial production rose on an annual basis for a thirteenth month in June.

BBVA's data show "consumption stays relatively strong but investment demand is slowing down, which finally concludes an ongoing but very slow adjustment for the domestic demand," Seda Guler Mert, chief economist of Turkey at Garanti BBVA told Bloomberg via email. "Given the recent momentum and a better global growth outlook, risks remain to be on the upside for 2021 GDP growth even for our above-consensus forecast of 9%."

Turkey's "problem is not growth but inflation," said Alvaro Ortiz, head of Big Data Analysis at BBVA Research. The government's growth push in 2020 saw the currency weaken by 20%, keeping consumer inflation in double digits. This year's data expose the challenges facing central bank Governor Sahap Kavcioglu as he tries to restore price stability amid President Recep Tayyip Erdogan's calls for lower interest rates.

The central bank held the key rate at 19% for a fifth month as inflation accelerated to 18.95% in July, wiping off much of the real yield. The lira has weakened more than 13% against the dollar since the abrupt appointment of Kavcioglu in March.