International credit ratings agency Fitch Ratings, in its Global Economic Outlook for March 2020 published on its website, has revised its forecast of Turkey’s GDP growth for 2020 to 3.7%. The agency’s analysis behind this revision was as follows:
“Fitch has raised its 2020 GDP growth forecast for Turkey by 0.6pp to 3.7% since the last GEO, due to better-than-expected 4Q19 outturn, strong economic indicators in early 2020 and expansionary monetary policy, but the upgrade has been tempered by the global slowdown. The economy expanded 1.9% qoq in 4Q19, much higher than the 0.4% increase that we forecast in December, boosting annual growth to 0.9% (0.4% in December). The pick-up was driven by easing inflation in 4Q19, supporting real income, and a credit-fuelled increase in private consumption.
The recovery in investment that began in 4Q19 is expected to continue in 2020. A recent pick-up in manufacturing PMI, increasing industrial production and capacity utilisation and improving confidence indicators confirm that strong domestic demand momentum is gathering pace.
Pro-growth fiscal policy and a loose monetary stance revived domestic demand in 2H19 and we expect strengthening credit growth in 2020. Private bank lending is growing at 24% and consumer credit 43% (on a 13-week annualised basis), and we expect full-year aggregate credit growth above 15%.
However, the net trade contribution to growth will turn negative this year as dynamic domestic demand leaks into surging imports while export growth is dampened by an economic recession in Europe and sharp growth slowdown in the US. This will lead to the re-emergence of a current account deficit.
The Central Bank of the Republic of Turkey (CBRT) further cut interest rates by 100bp in March to 9.75% to counter potential economic and financial repercussions of the coronavirus. The CBRT slashed rates by a cumulative 14.25pp since June 2019, bringing current real rates to -2.4%. Inflation is likely to slow to 10.5% in 2020 and 10% in 2021 due to negative output gap, the removal of administered price rises and declining inflationary pressures from lower commodity prices. However, we expect rising pressures from a weaker lira will be a constraint on further large interest rate cuts.”