Turkey’s 2020 economic growth dynamics and 2021 outlook

Turkey's growth figures were published earlier this week, and in a year such as 2020 that is difficult to manage, particularly due to the confusion following the aftershocks of the pandemic, Turkey ended up having a fairly good year in spite of everything, as its economy grew by 1.8%.

WHAT ARE THE DYNAMICS OF GROWTH?

In my opinion, one of the most important elements of the growth in 2020 was the increase in investments, namely the formation of gross fixed capital. Investments, which grew by 6.5% according to the Gross Domestic Product figure of 2020, calculated using the expenditure method, has finally put to rest questions over the quality of growth, which for a while has been the subject of criticism. Of course, the effectiveness of economic policies that facilitate access to finance and reduce financing costs during the pandemic period is also indisputable.

Meanwhile, the situation on the foreign trade front should not be overlooked. In 2020, exports of goods and services decreased by 15.4 percent, while imports increased by 7.4 percent. However, we should state that the trouble on the export front stems mainly from the second and third quarters, that is, the time when the pandemic hit foreign trade the hardest. Of course, let's not forget that the huge loss in tourism revenues has also greatly contributed to this.

RECORD GROWTH IN THE FINANCE SECTOR

When we take a closer look at the activities that make up the Gross Domestic Product, we can surmise that the total added value of finance and insurance activities increased by 21.4% when compared to the previous year on the basis of the chained volume index.

While finance and insurance activities grew by 41.1% in the third quarter of 2020, growth in the sector hit 27.8% in the second quarter, when the economy shrank by 9.9%. These activities had a relatively modest increase of 1.6% in the first quarter alone.

MACHINERY AND EQUIPMENT INVESTMENTS REASON FOR HOPE

In the last quarter of 2020, machinery and equipment investments increased by 38.7 percent compared to the same period of the previous year, showing the best increase since the second quarter of 2010. Thus, the annual growth in machinery and equipment investments was at 21%.

EXPECTATIONS FOR 2021

Numerous international organizations’ 2021 growth expectation for Turkey were revised upwards. This is good news, of course. However, when we look at how this will happen with the extremely tight monetary policy and high interest rates implemented for some time, it becomes easier to understand that the forecasts are mainly due to the strong base effect. So what is this base effect? Let us explain in terms of the growth rate; If the growth rate is too low for any reason in the reference period, even a small increase in growth over the next period indicates a much higher percentage arithmetically.

In a nutshell, as a result of the current interest rates and extremely tight monetary policy, Turkey will probably continue to grow further in 2021, although we cannot match the increase we saw in investments in 2020.