Published on Monday, June 1, 2026

Türkiye| Cooling Demand, Challenging Outlook

Summary

The Turkish economy grew by 2.5% y/y in 1Q26, in line with our expectations, but continued to lose momentum on a quarterly basis. The prolonged conflict and tight financial conditions pose downside risks to the growth outlook, while the deteriorating external balance is reducing the room for supportive measures.

Key points

Key points:
Production remains weak amid moderating demand conditions. While sectorial growth (exc. taxes and subsidies) has gained some momentum, the recovery appears unbalanced. Industry and construction contracted, whereas services and agricultural sectors contributed positively to quarterly growth.
Demand conditions continued to cool broadly in line with our expectations but domestic demand proved more resilient than anticipated as the main drag on domestic demand came from the contraction in investment expenditures, while net exports continued to make a negative contribution amid subdued external demand.
The demand-supply imbalance has narrowed somewhat, supported by a recovery in inventories over the past two quarters, while we estimate that the output gap has turned more negative. Nevertheless, the moderation in demand conditions in 1Q26 was not sufficiently disinflationary to offset other upside risks to the inflation outlook.
Growth could remain weak in 2Q26 due to the war in the Middle East, as signaled by confidence indicators. However, bridge-day effects associated with the extended holiday could generate volatility in monthly data. Our nowcasting monthly GDP indicator pointed to annual growth of around 2% as of May, although this could be partially reversed in June. Looking ahead, calendar effects could provide additional support to growth in 2H26.
The deteriorating external balance is reducing the room for supportive policy measures, while fiscal support is also likely to remain limited. Under the assumption that the conflict is resolved before July and policy responses remain selective, we believe GDP growth is likely to come in at around 3% in 2026, compared with our pre-conflict forecast of 4%.