Publications

The sensitivity remains on growth and employment outlook, potentially generating a policy mix where monetary stance staying relatively tighter compared to our early March baseline scenario and fiscal policy not being able to be tightened as targeted in the Medium Term Program (MTP).

Global financial volatility has risen due to the impact of evolving US policies, which we expect to create negative shocks. In Türkiye, financial conditions have recently eased above the neutral level and credit growth has accelerated beyond the capped segments, increasing the challenges on the inflation outlook.

Restrictive monetary policy and tight financial conditions lead output gap to turn into negative in 3Q24. Fiscal consolidation is projected for 2025, which could provide room for a gradual monetary easing. Overall, the policy mix will become more restrictive, potentially curbing GDP growth to below 3% in 2025.

The economic activity shows signs of cooling, while the normalization in demand continues to be gradual. The inflation trend continues easing in the presence of historically much tighter monetary stance. Still, high inflation expectations and supportive fiscal stance remain as the challenges on the inflation outlook.

The key point remains to be suppressing consumption since the slow-down in domestic demand is still limited and aggregate demand remains stronger than supply. We eliminate our previous downward bias on 2024 GDP forecast (3.5%) and get ready to have a downward revision on our exchange rate and inflation forecasts for 2024.

After the local election results, we expect the maintenance of current economic policies with more aggressive tightening in the short term. Therefore, expected additional restrictive measures might generate downside risk on our short term inflation (45% by 2024 end) and growth (3.5% for 2024) forecasts.

Turkish economy grew by 4.0% y/y in 4Q23 (vs. 3.6% exp. and consensus), leading to an overall GDP growth of 4.5% in 2023. We maintain our 2024 GDP growth forecast of 3.5%, for which we envisage pre-election fiscal impulse and expected capital inflows will be supportive.

We expect GDP growth to materialize closer to 4.5% in 2023 and decelerate to nearly 3.5% in 2024, where the fiscal stance and the size of capital inflows will be decisive. Leading indicators show that domestic demand remains stronger than supply, posing risks on both inflation and current account deficit.