Turkey’s economy rebounded powerfully in the second quarter to grow at a record pace after a sharp slowdown a year earlier caused by COVID-19 restrictions, official data showed Wednesday.

The gross domestic product (GDP) grew a massive 21.7% year-on-year in the April-June period, the Turkish Statistical Institute (TurkStat) said, marking the highest level in data that goes back to 1999.

The economy expanded 0.9% from the previous three months on a seasonally and calendar-adjusted basis, the data showed.

The first-quarter growth was revised to 7.2% from an initial 7%.

To battle surging COVID-19 cases, Turkey reimposed curfews, weekend lockdowns and restaurant closures this year, including a tougher but brief lockdown in April and May due to surging COVID-19 cases.

But manufacturing and the broader economy were largely unaffected by the measures, which were completely lifted in June.

Last year, Turkey contained the impact of the pandemic with a combination of interest-rate cuts and a government-backed credit stimulus that bolstered consumption.

The economy grew 1.8% last year, despite a 10.4% plunge in the second quarter, one of only a few globally to avoid an annual contraction amid the initial pandemic fallout.

It outperformed most G-20 nations in the second quarter. Turkey ranked second among Organisation for Economic Co-operation and Development (OECD) countries just after the U.K.

Britain posted a year-on-year growth of 22.2% among OECD countries (with available data) in the second quarter, versus a contraction of 21.4% in the same period last year. Spain ranked third, expanding 19.8% this April-June versus a decline of 21.6% last year.

The economies of Mexico and France expanded 19.5% and 18.7%, respectively during the same period. In the eurozone, annual GDP growth was 13.6% in this quarter while the rate was 13.2% in the European Union.

The GDP of the OECD area surged 13% year-on-year this April-June but it still remains below pre-pandemic levels.

Buoyant services

The Turkish economy’s growth in the second quarter was led by services, which expanded 45.8% annually, followed by industry growth of 40.5% and information and communication sector expansion of 25.3%.

Household consumption – estimated to account for about two-thirds of the economy – continued to be one of the main drivers of growth. It jumped 22.9% from a year earlier.

Slower growth was displayed by the real estate sector, which expanded 3.7%, construction at 3.1% and agriculture at 2.3%.

The size of the economy grew to $765.1 billion (TL 6.34 trillion) in the second quarter from $741.1 billion in current prices last year. Exports jumped 59.9% on an annual basis, while imports rose 19.2%.

Gross fixed capital formation, a measure of investment by businesses, rose an annual 20.3%. Government spending rose 4.2% after a 0.7% increase in the previous quarter.

‘Low inflation, FX stability critical’

Treasury and Finance Minister Lütfi Elvan, commenting on the growth data, stressed the importance of tackling inflation.

"For sustainable and comprehensive growth, low inflation, exchange rate stability and predictability are of critical importance. We are trying to make it happen," Elvan said on Twitter.

"We strive to maintain a growth that will further improve fair income distribution," he noted.

Elvan said investments and net foreign demand accounted for 57% of the growth in the April-June period.

August’s inflation reading, due on Friday, is expected to stay close to the 18.95% logged in July, driven by consumer demand, Turkish lira depreciation that has raised import costs, and a worldwide rise in commodities prices.

Turkey’s central bank expects consumer prices to dip to 14% by year-end.

Also elaborating on the figures, Trade Minister Mehmet Muş said exports of goods and services also held a massive share in the growth.

Muş noted that the contribution of exports to growth stood at 10.8 points.

"This is the highest contribution recorded since 1998," the minister noted. "Half of the growth was driven by exports of goods and services."

"We will further increase this contribution with the steps we will take in areas such as additional export support, faraway country strategy and e-export. We will continue to grow on the basis of investment, production and export."

The second-quarter data came in parallel to market expectations.

Forecast in a Reuters poll of 14 economists was for a 21.7% growth annually. This could push the GDP growth to 8% or more for 2021.

Bloomberg surveys expected a 21% growth from a year earlier and 1% from the first quarter. Forecasts in an Anadolu Agency (AA) survey were for a 21.8% growth and more than 8% for the whole year.

The government officially forecasts 5.8% growth this year, though Elvan said it could top 8% annually with a robust April-June performance.

Upward revisions

Some leading indicators have reinforced the picture of the continuing expansion, prompting some upward revision.

The official economic confidence index stands at above 100, indicating an optimistic outlook. Industrial production rose on an annual basis for the 13th month in June.

The upbeat in the country’s factory activity also continued in August due to solid improvements in output and new orders.

Seen as one of the precursors to growth figures, the Purchasing Managers’ Index (PMI) for manufacturing rose to 54.1 in August from 54 a month earlier.

The headline reading marked the highest level seen since January and hovered above the 50.0 mark that denotes growth for the third consecutive month.

"July-August leading indicators showed that economic activity sustained its momentum in the third quarter," said Bürümcekçi Consulting’s Haluk Bürümcekçi, who raised the full-year growth forecast to 9.3% from 7.7%.

In addition, international credit ratings agency Moody's on Tuesday upgraded Turkey's 2021 economic growth forecast from 5% to 6%.

In its Global Macro Outlook 2021-22 report, it also revised the growth expectation for 2022 from 3.5% to 3.6%.

It noted that a recovery in the tourism sector supported the growth in the Turkish economy thanks to the ongoing global economic recovery and progress in COVID-19 vaccination.

Wall Street investment banks JPMorgan and Goldman Sachs both also raised their Turkish economic growth forecasts on Wednesday on the back of strength in the country’s domestic economy and its export sector.

JPMorgan said it had revised its 2021 GDP growth estimate to 8.4% from 6.8%. It kept the 2022 forecast unchanged at 3.4%.

Goldman upped its 2021 forecast even further, to 9.5% year-on-year from 7.5% previously.

"Overall, the Turkish economy has been able to grow faster than we thought without a deterioration in its external balances, as the pickup in foreign demand has been very supportive," its economists said in a note.