The latest data on the leading indicators in Turkey show that the economy has started recovering, the European Bank for Reconstruction and Development’s (EBRD) regional chief economist said Thursday.

"Our forecasts include a continuation of the increase we have seen in the data as of the second half of this year to date," Roger Kelly told Anadolu Agency (AA).

Kelly’s remarks came after the EBRD revised its growth forecasts for emerging economies where it invests as the coronavirus fallout is estimated to last longer than previously expected.

The bank said economies could contract by 3.9% this year due to a high level of uncertainty. The economies are expected to grow 3.6% next year, it noted.

The previous forecast showed a decline of 3.5% for 2020 and a stronger recovery of 4.8% in 2021.

The bank kept its forecast unchanged for the Turkish economy, which it said is expected to narrow by 3.5% in 2020, following a fall in external demand which led to a sharp drop in exports.

Turkey’s gross domestic product (GDP) growth is projected to pick up to 5% in 2021, according to the report.

Just like all other economies, the Turkish economy has also been affected by the pandemic.

"Turkey is an economy that has a tendency to recover quickly and where consumption has a driving force. That is why we have a strong growth forecast for 2021," Kelly said. "(In Turkey) we expect the economy to grow at 5% in 2021 after contracting 3.5% this year."

Turkey’s GDP in the April-June period shrank 9.9% from a year earlier after growing 4.4% in the previous three months.

Announcing the country’s New Economic Program for the 2021-2023 period on Tuesday, Treasury and Finance Minister Berat Albayrak said Turkey expects its economy to grow by 0.3% this year as it recovers from the impact of the pandemic, but he warned of a 1.5% contraction in the worst-case scenario.

The minister said that the GDP growth would accelerate to 5.8% in 2021. The program projects 5% growth in 2022 and 2023.

Albayrak said normalization steps will continue in the coming weeks and will support financial stability.

Kelly, however, warned that the reimplementation of social measures in the coming period due to a possible second wave of the pandemic could hamper the economic recovery.

He also said that Turkey may face potential challenges such as the economic effects of the outbreak, the performance of the Turkish lira, macroeconomic balance and geographical risks.

"There may also be some opportunities that the pandemic offers for the Turkish economy," Kelly said. "Especially in terms of trade changing direction because companies want to shorten their supply chains ... Turkey’s geographical location and flexible manufacturing base can offer the opportunity to bring trade closer to the center, especially in terms of trade with the EU."

‘Interest rate hike a brave step’

On last week’s surprise interest rate hike by the Central Bank of the Republic of Turkey (CBRT), Kelly expressed hopes that the fact that the bank has raised rates for the first time in two years is a sign of a renewed focus on macroeconomic stability.

The CBRT unexpectedly hiked interest rates by 200 basis points to 10.25%, tightening policy for the first time in two years to support the Turkish lira and rein in inflation. The policy rate had been held at 8.25% since May – in the middle of Turkey’s coronavirus lockdown – following a nearly yearlong aggressive easing cycle that chopped it down from 24%.

"These are highly sensitive times for policymakers ... The recovery is still fragile and in the early stages of the process. In that sense, the decision to raise rates was a brave step. I hope that this is a sign that the authorities are ready to take the necessary policy steps to maintain the appropriate balance between recovery and macroeconomic stability," Kelly noted.

In addition, EBRD Chief Economist Beata Javorcik said that output in the bank's regions narrowed sharply in the second quarter by 8.2% year-on-year.

"The speed of recovery is expected to be similar to the one observed in the aftermath of that crisis, with pre-pandemic levels of GDP returning toward the end of 2021," Javorcik said.

Noting that EBRD economies saw pressure on supply and demand because of the virus-related measures, she underlined that external shocks included low commodity prices, shrinking exports, a collapse in tourism and drops in remittances.

Economies highly dependent on external sources of income, such as Albania, Croatia, the Greek Cypriot administration, Greece and Montenegro, are expected to see the largest shrinkage this year, the report noted, adding that those countries lost most of their tourist season this year.