Türkiye | Soft Landing in Progress

Summary

Hard data confirmed a soft landing in 2Q25, while early 3Q25 indicators still signal weakness in activity. We maintain our 2025 GDP forecast at 3.5% for now, though risks are slightly tilted to the downside.

Key points

• Key points:
• Hard data has confirmed, amid weakening domestic demand, production decelerated in 2Q25, driven particularly by services and industrial sectors. Leading indicators suggest that this weakness in output is likely to persist at the beginning of 3Q25.
• Our monthly GDP indicator nowcasts an annual growth of around 4.5%, being boosted by favorable calendar effects; while quarterly GDP growth might decelerate towards 0.5% (vs. 1.0% of 1Q25). However, high volatility in data introduces significant uncertainty into our nowcasts as our model results vary within a range of 0% to 1% for quarterly GDP growth.
• Tight monetary policy and restrictive financial conditions put downward pressure on domestic demand, and foreign demand remains benign. Hard data on demand has confirmed the weakening seen in prior survey-based demand indicators. While the slowdown in goods consumption has been relatively modest, services consumption has been more significantly impacted.
• Expected gradual monetary easing, lower than targeted fiscal consolidation and recent decline in global trade uncertainty could be supportive going forward. We maintain our 2025 GDP growth forecast of 3.5% GDP, with risks slightly to the downside depending on the pace of recovery.
• More pronounced gap between inflation forecasts and revised interim targets suggest that the CBRT could act more aggressively, yet, with inconsistencies on the growth forecasts of around 3% in 2025 and 4% in 2026, based on our calculations using their output gap projections. Hence, the sacrifice ratio still appears to be low. The Medium Term Program (MTP), to be released in early September, will shed light on the political preferences on near term growth outlook.

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