Türkiye| Weak Activity Meets Geopolitical Shock

Summary

Economic activity has been weaker than implied by soft indicators, even before the conflict. The longer and deeper-than-expected impact of the war poses clear downside risks to our pre-conflict 2026 GDP growth forecast of 4%, where a more severe trade-off on growth could happen, depending on the external financing needs.

Key points

• Key points:
• Production had shown signs of a recovery before the Middle East conflict, but the overall outlook has remained weak. While industry and construction exhibited clearer weakness, the services sector showed a modest recovery
• March leading indicators point to a sharp deterioration in expectations, orders, and production. Our Monthly GDP Indicator nowcasts 2.7% y/y growth, implying around 0.5% q/q growth in 1Q26.
• The weakness in the production outlook has so far been driven by weak demand conditions. Domestic demand (excluding inventories) points to a quarterly contraction, led by private consumption, while external demand is likely to make a slight negative contribution in 1Q26. Looking ahead, tighter financial conditions may further weigh on domestic demand, and exports could remain weak amid subdued global demand.
• Available fiscal space could help offset some downside risks to growth. However, war-related deterioration in the external balance may deepen the growth trade-off. Despite some recovery, potential pressure on the CBRT reserves, elevated inflation expectations, and a strong underlying inflation trend suggest that a tight monetary policy stance will need to be maintained for longer.
• According to our calculations, a 10% increase in oil prices due to a supply shock would reduce growth by around 0.3pp within a year. Considering the longer duration of the war and the energy & supply-chain shocks so far, there are clear downside risks to our pre-conflict GDP growth forecast of 4% for 2026. Even if a ceasefire is reached by 2Q26, uncertainty remains regarding its durability and the pace of normalization in supply chains. We will revise our forecast once the outlook becomes clearer.

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