Economic Outline

Economic Indicators

Turkish growth rebounded strongly from the initial impact of the pandemic, reflecting a dynamic private sector and stimulative policies, the country being among the few countries not to dive into recession. Turkey’s growth was buoyant in 2022 (+5.5%) and continued expanding in 2023 as sizeable pre-election stimulus further boosted domestic demand. For the year as a whole, the IMF estimated GDP growth at 4%, with household consumption as the main driver, coupled with government consumption and upbeat investment in machinery and equipment; whereas the contribution of net exports was negative. Following the March 2024 local election period, private consumption is expected to make a lesser contribution to growth. In contrast, government expenses are anticipated to maintain a positive impact, primarily driven by reconstruction following the February 2023 earthquakes (estimated at approximately USD 26 billion) and potential additional expenditures preceding the local elections. Overall, the IMF forecasts a GDP growth of around 3% over the forecast horizon.

Fiscal policy remained supportive in the first half of 2023. However, following the general and presidential elections in May, the authorities have gradually intensified the monetary policy position, leading to a doubling of the policy rate from June to September, reaching 30%. Additionally, the government has implemented numerous substantial tax hikes aimed at mitigating the substantial budget deficit and funding expenditures related to earthquake reconstruction. The government deficit was estimated at 6.4% of GDP in 2023 and is expected to remain high this year (4.4%) before declining marginally in 2025 (3.8%). Despite such a deficit, the substantial snowball effect stemming from elevated inflation contributed to keeping the government debt-to-GDP ratio near its 2022 level, notwithstanding the influence of lira depreciation, although the share of foreign-currency-denominated debt at end-July remained high at 67.1% (Fitch Ratings). Despite the adoption of a more restrictive policy stance, the expectation is that inflation – at 51.2% in 2023 - will remain elevated in the short term. This is attributed to factors such as inflation inertia, persistently high inflation expectations, and the repercussions of recent lira depreciation and tax increases. The gradual adjustment of excessive domestic demand is expected to play a role in a moderate reduction in inflation and the gradual improvement of external imbalances.

According to IMF estimates, employment partially recovered along with the rebound in economic activity, hence the unemployment rate decreased to 9.9% in 2023, its lowest level in nearly a decade, and is forecast to stabilize at around 10% over the projected period. Market conditions remain challenging, particularly among females and the youth. Wage inequality and the size of the informal sector remain long-standing problems. In 2023, the IMF estimated the country’s GDP per capita (PPP) at USD 41,888, 26.4% below the EU average.

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