The World Bank now sees Turkey’s economy contracting 1% in 2019, according to the June issue of its twice-yearly Global Economic Prospects report released on May 4.
The international financial institution revised down its expectation by 2.6pp from the assessment given in the January issue of the report. Turkey’s debt-fuelled economy has suffered a painful hard landing, considering the 7.4% ‘warp drive’ expansion it experienced in 2017 and 2.6% growth rate (estimated by the World Bank, possibly subject to later revision) posted in 2018. In 2020, Turkish growth will come in at 3%, if the World Bank’s latest forecasting for 2020 proves correct.
Turkey technically exited recession in Q1 this year—its seasonally and calendar-adjusted GDP grew by 1.3% q/q in the quarter following the contractions seen in the previous three quarters, statistical institute TUIK said on May 31. However, there are fears that the recovery was driven by a pre-local elections credit expansion and that Turkey could dip back into recession later this year.
In its latest Global Economic Prospects report, entitled “Heightened tensions, subdued investment”, the World Bank warned: “Global growth has continued to soften this year. Subdued investment in emerging market and developing economies (EMDEs) is dampening potential growth prospects. Risks to the outlook remain firmly on the downside, including the possibility of escalating trade tensions.
“Another concern is rising debt, which may make it difficult for EMDEs to respond to adverse developments and to finance growth-enhancing investments. Reforms to boost private investment and productivity growth are needed, particularly in low-income countries, which face more significant challenges today than they did in the early 2000s.”
Turning to Turkey, hit by a currency crisis last summer which some observers fear could be repeated this year, the report said: “In Turkey, growth is expected to be weighed down by increased inflation and associated pressure on real incomes, banking and corporate sector deleveraging following several years of rapid credit growth, and low business and consumer confidence.
“Activity is expected to bottom out in 2019, with annual growth contracting 1 percent, but the recent flare up in financial market pressures highlight that downside risks remain sharply elevated. The recovery is assumed to strengthen in 2020 through gradual improvement in domestic demand and continued strength in net exports, provided that fiscal and monetary policy avert further sharp falls in the lira and corporate debt restructurings help avoid serious damage to the financial system.”
The report also noted that the financial stress in Turkey has had limited spillovers to other economies in Europe and Central Asia region.
“However, the experience of Turkey is a stark reminder of the risk of sudden shifts in investor sentiment—in particular for countries with large current account deficits or reliance on potentially volatile capital inflows, high external debt loads, or sizeable foreign-currency-denominated debt (Belarus, Croatia, Georgia, Kyrgyz Republic, Moldova, Tajikistan, Ukraine),” it added.
Risk of structural reform reversal
Looking at the worsening trade war situation caused by the Trump administration’s fights with China, Mexico and India, among others, the report reflected: “Further escalation of international trade restrictions could have a negative impact on the region, given its openness to trade and capital flows. A reversal of structural reforms remains a risk in many countries, especially Armenia, Azerbaijan, Belarus, Turkey, and Ukraine. Renewed conflict in the Syrian Arab Republic or Ukraine could trigger new sanctions.”
Growth in the Europe and Central Asia region is projected in the June Global Economic Prospects report to sharply decelerate to a four-year low in 2019 of 1.6%, down from 3.1% in 2018, and 0.7pp lower than the previous World Bank forecast. It reflected “weaker-than-expected activity in Turkey and Russia, as well as some smaller economies”.
In a note on monetary policy across Europe and Central Asia (ECA), the report observed: “In response to deteriorating global growth prospects, central banks in major economies have provided additional monetary policy accommodation since the start of 2019, resulting in easing global financing conditions. The tightening cycle in monetary policy in 2018 has paused in ECA, with some economies cutting policy rates (Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, North Macedonia, Ukraine) or leaving them unchanged in 2019, but overall policy rates in some large ECA economies remain higher than in 2018 (Russia, Turkey).”
Recapping on how the Turkish economy slowed sharply and entered a recession in the second half of 2018, the World Bank said in its report that “the downturn was triggered by corporate fragility stemming from rising levels of debt, often denominated in foreign currency, and exacerbated by policy uncertainty”.
It added: “This led to significant pressure on financial markets and the value of the lira… The deceleration of activity was partly driven by significant financial outflows from Turkey amid market concerns about high current account deficits and policy developments, which led to sharp falls in investment and private consumption.”
The report added: “The baseline projection for regional growth is predicated on the assumption that Turkey’s economy bottoms out in 2019 and that spillovers from slowing growth in the Euro Area are limited. The baseline also assumes no further escalation in trade tensions between the United States and China or other major trading partners, no disorderly exit from the European Union by the United Kingdom, and an absence of policy missteps in economies that recently suffered acute financial stress—mainly Turkey.”