OECD Economic Outlook, Volume 2025 Issue 1

Türkiye

Output is expected to grow by 2.9% in 2025 and 3.3% in 2026. Tighter financial conditions and fiscal consolidation are moderating household consumption. Private investment and export growth will slow in 2025 due to weaker trade, before picking up gradually in 2026. Inflation is projected to decline substantially thanks to tight monetary policy and decline to around 15% by the end of 2026. However, upside risks to inflation remain significant and the impact of developments in international trade is uncertain.

Fiscal and monetary policies should remain contractionary to ensure inflation remains firmly on a downward path. In 2026, lower inflation will allow the monetary policy stance to become less restrictive, bolstering growth. Structural reforms, notably in the labour market and in competition policy, can support macroeconomic stabilisation and raise long-term growth potential.

Data point to a continued slowdown in growth

Growth slowed from 5.1% in 2023 to 3.2% in 2024 as the economy rebalanced away from its previous overreliance on domestic consumption towards a stronger contribution of net exports. Tight financial conditions weighed on domestic demand, causing a sharp growth slowdown in household spending and investment. Consumption and investment strengthened markedly in late 2024, but it is still unclear if this marks a turnaround. Furthermore, leading indicators, including the purchasing managers index and manufacturing capacity utilisation, continue to decline, pointing to weaker output growth. By contrast, job creation has been solid, with unemployment remaining on the downward trend seen since the pandemic. Inflation has fallen sharply from 75% in May 2024 to 38% in April 2025, although inflation remains visible in housing and education; inflation expectations also remain high.

Türkiye

Source: Bank for International Settlements (BIS); CBRT; and TurkStat.

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Türkiye: Demand, output and prices

Statlink

The depreciation of the Turkish Lira since March (both the nominal rate against the US dollar and the real effective exchange rate) has had a limited impact on imported inflation so far – thanks in part to the following increase in the policy rate – but a higher pass-through may eventually be visible. Uncertainty about global trade should affect the economy mostly through indirect channels as some of the country’s export sectors are likely to be affected by a potential slowdown in European demand. While Türkiye’s exports of goods to the United States are subject to the 10% universal tariff, they only account for about 6% of exports and 1% of GDP. Furthermore, Türkiye has been subject to US tariffs on steel and aluminium since 2018, and is hence less affected by the new 25% rate on all countries.

Monetary and fiscal policy will remain contractionary

Both fiscal and monetary policies have contributed decisively to the recent decline in inflation. The fiscal deficit is expected to decline from 4.9% of GDP in 2024 to 3.3% in 2025 and 3.0% in 2026. This consolidation will be driven by lower levels of capital and transfer expenditures, along with improved revenue performance. The size of the consolidation is likely to be smaller than previously expected due to trade uncertainties and lower growth prospects. The sharp increase in the monetary policy rate is continuing to bring down inflation. The policy rate was raised again to 46% on 17 April, amidst global trade uncertainty and pressure on the Turkish Lira. As inflation decreases further and uncertainty dissipates, space for some gradual easing will eventually emerge. The policy rate is expected to reach 25% by the end of 2026, absent a marked resurgence of global trade and financial tensions or renewed inflationary pressures.

Growth will strengthen in late 2025 and 2026

Growth will remain modest in the first half of 2025 due to trade uncertainties and continuously tight financial conditions. Headline and core inflation are expected to fall from 31% in 2025 to under 19% in 2026, with year-on-year inflation approaching 15% by the last quarter of 2026. As disinflation proceeds, a less contractionary monetary stance is projected to support consumption and investment from the end of 2025 onwards. While exports are expected to accelerate in late 2025 and 2026, this will be more than offset by import growth, and net exports will contribute negatively to GDP growth in 2026. A more persistent slowdown in global trade and European demand could weigh on growth in 2026, while renewed inflationary pressures or foreign exchange tensions would require tighter financial conditions for longer.

Macroeconomic stabilisation policies should be sustained

The authorities should continue to prioritise the stabilisation of the economy until inflation is firmly on track to meet the target. Alongside current fiscal consolidation efforts, the government should continue to closely monitor risks from contingent liabilities. Ensuring a stable and predictable policy framework would significantly improve investor sentiment and attract international investment. Fostering female labour force participation, enhancing innovation and training policies and efforts to streamline business regulations would raise long-term growth potential and investment. Making permanent labour contracts more flexible and ensuring that minimum wages are affordable for businesses could also promote formal job creation.