Turkey's economy contracts 10% in second quarter on pandemic hit

The weakness of the Turkish currency is adding to its economic woes

Skyscrapers stand on the skyline of the business district in Istanbul. Fitch Ratings revised the outlooks of Turkey’s two state-owned development banks, to negative . Bloomberg

Turkey's economy contracted by 9.9 per cent in the second quarter on annual basis as the country's coronavirus lockdown brought economic activity to a near standstill, according to data on Monday that showed its its worst performance in a decade.

While less precipitous than expected, the drop in gross domestic product was still historic compared to the first quarter at a seasonally and calendar-adjusted 11 per cent, according to the Turkish Statistical Institute.

Turkey's $770 billion (Dh2.83 trillion) economy is used to more than 5 per cent growth driven by booming construction financed by cheap foreign credit. But a 2018 currency crisis, the Covid-19 pandemic and new lira weakness has brought two sharp slumps in as many years.

Many larger economies, however, fared worse in the second quarter than Turkey and it also outpaced some peers including Mexico and Poland, whose economies shrank on a quarterly basis of more than 20 per cent and over 12 per cent respectively.

The data had little impact on the lira, which was slightly weaker at 7.3400 against the dollar.

In the first quarter, Turkey's economy grew by 4.4 per cent from the same period in 2019, according to a slight revision from the initial figure. It was boosted by a lending spree just before the pandemic struck Turkey in March.

The financial sector stood out with 28 per cent growth in the second quarter, while the large industry and services sectors shrank 16 per cent and 25 per cent respectively.

In the beginning of March, Ankara shut schools, some businesses including many factories, closed borders and enforced weekend stay-home orders. Much of the economy was reopened in June, though new virus cases have started climbing up in recent weeks.

"The rest of the year will depend on the pandemic [and] especially the recovery of demand in private consumption," said Tera Yatirim economist Enver Erkan. "Positive growth this year looks difficult."

In a Reuters poll of 14 economists, the median estimate was for a 11.8 per cent contraction in GDP on annual basis, with estimates ranging from declines of 7.1 per cent to 13.1 per cent.

Finance Minister Berat Albayrak, who has forecast between 2 per cent contraction and 1 per cent growth this year, said on Twitter the GDP data was good compared with other countries, and Turkey was determined to wipe out the coronavirus effects going into 2021.

A severe hit to the key tourism sector means the economy is also expected to shrink for the full year.

Turkey's economy last contracted on an annual basis in the midst of the global financial crisis in 2009, by 4.7 per cent.

The central bank has cut rates aggressively from mid-2019 but has held policy steady over the last few months as the lira dropped to record lows, threatening bigger problems for the economy.