This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries.The economic situation and policies of Turkey were reviewed by the Committee on 12 November 2020. The draft report was then revised in the light of the discussions and given final approval as the agreed report of the whole Committee on 22 December 2020. The Secretariat’s draft report was prepared for the Committee by Rauf Gönenç, Dennis Dlugosch, Selçuk Gül and Cem Çebi under the supervision of Sebastian Barnes. Hüzeyfe Torun and Yusuf Kenan Bağır from the Structural Economic Research Department of the Central Bank of the Republic of Turkey contributed firm-level analyses for the Thematic Chapter. Statistical research assistance was provided by Eun Jung Kim and editorial assistance by Michelle Ortiz and Héloïse WICKRAMANAYAKE.The previous Survey of Turkey was issued in July 2018.Information about the latest as well as previous Surveys and more information about how Surveys are prepared is available at www.oecd.org/eco/surveys

The impact of the pandemic on economic activity unfolded later than in other countries in the region, but was sharp. Turkey managed to contain the number of COVID-19 cases relatively effectively in the first phase of the outbreak, thanks to a strong intensive care infrastructure and targeted lockdowns. Cases however surged again after the easing of containment measures in June and continued to increase sharply in Fall. Employment and aggregate demand contracted strongly in the first wave, then rebounded following vigorous government support. However, they are again facing headwinds. Tourism and hospitality sectors, which generate high demand for other products and services and provide employment across many regions, are particularly affected. The authorities have provided ample quasi-fiscal support to safeguard corporate liquidity, employment and incomes of households. The Central Bank flanked these measures with a more expansionary monetary stance and financial policies promoted massive credit expansion. The government began to scale down these measures after an increase in the current account deficit and inflation, a weakening in investor confidence and a sharp exchange rate depreciation between July and October.

After only partly recovering from a sharp macroeconomic correction in the summer of 2018, Turkey was hit by the COVID-19 shock in spring 2020, slightly later than other countries in the region. While Turkey managed to contain the number of contagion cases relatively effectively in the initial phase, domestic containment measures and the drop in tourism had a severe effect on the economy. Activity contracted, employment fell from an already depressed level after the 2018 shock, and pressures mounted on well-being and social cohesion. Some population groups have suffered more, including informal workers, women, refugees and the youth.

The growth of potential output has declined in the period since the mid-2010s, reflecting both lower investment and to a lesser extent, a smaller contribution of total-factor productivity (Figure 2.1, Panel A). The growth rate of labour productivity was above most peer countries in recent years, but grew less quickly than over the 2010-2014 period (Figure 2.1, Panel B). This implies that Turkey has succeeded in catching-up but that the catch-up process may have slowed. The slowdown likely results from a combination of different factors, including structural impediments to competition and a policy environment that is less conducive to capacity-enhancing investment but also the maturing of the economy. Despite major progress in recent years, average levels of manufacturing investment, labour productivity, the share of R&D expenditures in GDP, exported value added and skills of workers are relatively low compared to other OECD countries (see OECD, 2018a; KPI and further below), suggesting that a new wave of structural reforms is needed to reinvigorate a faster catch-up.