After having endured one of steepest rises in Covid-19 cases in March-April, Turkey’s epi curve had flattened since late April. However, new case growth has seen a renewed rise since August. As a response, the government introduced various measures, though restrictions are not as stringent as earlier in the year. In our baseline, we don’t expect a return to the same levels of restrictions, even if new case growth continues to move higher.
Q2 real GDP contracted by 10% yoy – the weakest data print since the GFP. This said, the reasonably fast containment of the virus and faster-than-expected easing of restrictions led to a smaller contraction than initially expected. Looking ahead, latest high-frequency data suggest that significant economic recovery is underway, with robust retail sales growth and the PMI above 50 for the third straight month, on the back of pent-up domestic private consumption, fiscal support as well as huge credit extension by public banks.
On the flipside, PMI components point towards an uneven economic recovery while also the unemployment rate continues to rise. On the back of a higher than expected Q2 reading, a likely expected stronger rebound in Q3 than previously expected and better external outlook, we have revised up our full year growth forecast to -2.5% (-5.1% initially), followed by a recovery of ~4% next year.
Downside risks remains high
The sectors that have been the most severely impacted by the crisis – tourism, restaurants and manufacturing are likely to take significant time to reach their precrisis levels.
Inflation dynamics which were already elevated going into the crisis, remain one of the main concerns for Turkey. Supply-side constraints limit the deceleration in inflation despite the shortfall in demand, while in addition, renewed FX weakness has added further upside risks. Headline inflation should average 11.5% for the rest of the year – well above the central bank’s expectations. In 2021, we expect headline inflation to remain in double digits driven by the expected pickup in consumption.
Rate hikes underway
The CBT initially lowered its one-week repo rate by 250bps since the virus outbreak to 8.25% – along with injection of TRY liquidity and buying government securities in the secondary market. This said, the CBT was forced to reverse the easing measures following higher price pressure and ongoing FX weakness. Instead of outright hikes, the CBT implemented backdoor tightening and increased the average funding rate by 300bp to 10.50%. Given the still negative onshore real rates and large FX deposit accumulation by locals, we expect additional tightening with funding rates to reach at least 12% – with upside risks in case FX does not stabilize.
From Goldman Sachs Report World Outlook Update: Recovery progressing amid uncertainty
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