Pandemic, domestic woes dim Istanbul’s economic luster

Mar 10, 2021

Istanbul — The powerhouse of the Turkish economy and an aspiring global hub — has suffered a notable decline amid the country’s economic turmoil over the past several years. While Turkey’s gross domestic product (GDP) expanded 1.8% in the pandemic-hit 2020, Istanbul’s economy is estimated to have shrunk about 3%, based on electricity consumption data.

The giant metropolis, which is home to some 16 million people, or a fifth of Turkey’s population, and contributes about a third of the country’s GDP, has lost much economic vigor since 2018 when Turkey’s economic woes began to deepen amid its transition to an executive presidency system. The pandemic has dealt heavy blows to the commerce, tourism and services sectors in Istanbul, aggravating unemployment and poverty in the city, which had thrived mainly on a construction boom and domestic consumption in earlier years.

On March 1, Turkey’s statistics agency announced that the country’s GDP grew 1.8% in 2020 — a costly achievement that bequeathed major fragilities to the economy. The regional breakdown of the GDP data will be available only in early 2022, but monthly electricity consumption data has traditionally been an accurate foretoken of growth. Indeed, the power consumption increase in Turkey last year corresponds to the 1.8% growth rate. 

The electricity data reveals major differences between provinces. In the Mediterranean province of Antalya, the heart of Turkey’s vital tourism industry, for instance, electricity consumption decreased more than 16% in 2020, pointing to a staggering economic contraction in the region amid the pandemic. 

In Istanbul, electricity consumption decreased 2.7% — a sign that the local economy shrank by a similar rate, unlike the country’s overall growth of 1.8%. The largest decrease occurred in the services sector, while the industry appears to have fared better.

The industry — the backbone of Istanbul’s economy until the 1980s — was outgrown by the services sector in the ensuing years as the city’s land value shot up and industrial activities shifted to neighboring provinces such as Bursa, Kocaeli and Tekirdag. Istanbul still contributes 25% of Turkey’s industrial value added, as major industries catering to domestic demand, especially in the food and apparel sectors, continue to operate in the city. Industrial enterprises accounted for 28% of Istanbul’s power consumption in 2020. Their electricity use increased notably in the second half of the year, resulting in an overall increase of 5% — a sign that Istanbul’s industrial value added could have grown by a similar rate.

Meanwhile, the services sector, including commercial, tourism and financial services, which have significantly expanded in recent decades, has come to account for nearly 40% of Istanbul’s electricity consumption. But in sharp contrast to the industry, the sector’s electricity consumption decreased 15% last year.

The city’s tourism sector took some of the worst blows from the pandemic as the global travel industry ground to a near halt. Service businesses in many other fields, from retail and dining to entertainment and arts, suffered heavy losses as well due to government-enforced restrictions. 

Foreign tourist arrivals dropped by a startling 71% in Turkey in 2020. Only about 5 million tourists visited Istanbul, a 67% decrease from some 15 million in 2019 when the city attracted more than a third of the tourist flow to Turkey. The turmoil had severe ripple effects on many other sectors connected to the tourism industry, including civil aviation.

Crucially, the pandemic exacerbated the crisis that had already hit the construction and real estate sectors after their unprecedented heyday under the ruling Justice and Development Party. The construction sector was among the first victims of Turkey’s economic turmoil in 2018, though it had driven the country’s economic growth for years as Ankara chose to encourage construction over industrial or other long-term investments. Istanbul was the center of the construction frenzy, which virtually pillaged the city’s urban rent and damaged its historical and cultural fabric. The crisis in the sector, resulting in big stocks of unsold or unrented real estate, led to a serious decline in its value added and fueled stagnation across Istanbul’s economy via interrelated sectors.

Istanbul contributes about 35% of the value added of Turkey’s construction sector and about 30% of that of realty trade. The two sectors account for 16% of Istanbul’s value added. 

The government managed to resuscitate home sales through a loan expansion policy in the second half of 2020, but the sector remains stricken in general. 

In sum, Istanbul’s economy seems to have mirrored the Turkish economy’s overall contraction of 10% in the second quarter of 2020, but it failed to match the relative recovery in the rest of the country in the second half of the year, which the government stimulated with cheap credit and moves to reign in the slump of the Turkish lira. Istanbul’s industry and some other sectors did benefit from those policies, but the commerce, tourism and other services sectors, which dominate the city’s economy, failed to perk up to the same extent. The agony of the tourism industry hampered the recovery of dining, accommodation and civil aviation businesses, coupled with government restrictions affecting a wide range of other services. And with the added impact of the crisis in the construction and realty sectors, Istanbul’s economy is likely to have shrunk about 3% last year, as the power consumption data suggest.

The economic downturn is certainly not without a hefty social cost. The official unemployment rate in Istanbul was nearly 15% in 2019, exceeding the country’s overall rate of 13.9%. About 23% of the 4.4 million jobless — more than 1 million people — were in Istanbul. Turkey’s official unemployment rate stood at 13% in December 2020, while an alternative calculation, encompassing those who have stopped actively looking for jobs, puts the rate at 28%. Given the city’s economic decline, unemployment in Istanbul is estimated to have worsened, aggravating poverty as well. A clearer picture will emerge when related data is released in the coming months.