Developments in the Turkish Economy

In the first quarter of 2024, the Turkish economy grew by 5.3% year-on-year, followed by 2.4% in the second quarter and 2.1% in the third quarter, resulting in an overall growth rate of 3.2% for the first three quarters. While growth decelerated in the third quarter compared to the second, the contribution of consumption to overall growth remained low due to a balanced demand composition. However, the contribution of net exports, a sustainable growth component, increased during this period. In the third quarter, private consumption contributed 2.3 percentage points to growth, up from 1.2 points in the second quarter, marking a partial recovery from its lowest level in the past 16 quarters (4 years). Despite this improvement, private consumption levels remained low. Conversely, public consumption slightly dampened growth by -0.1 points in the third quarter after contributing nothing in the second quarter, marking its first negative impact since the first quarter of 2021. In the third quarter, net exports positively contributed to growth, increasing it by 2.2 percentage points due to a significant acceleration in the decline of imports, despite a minor annual slowdown in exports. This marked the highest contribution to growth in the past three quarters, reflecting a quarter-on-quarter increase. While the annual rise in construction investments remained robust, it experienced a partial quarter-on-quarter slowdown, resulting in a reduction of growth by -0.2 percentage points. This decline was driven by an acceleration in the annual contraction of machinery investments, marking the first negative impact since the third quarter of 2022. Additionally, changes in inventories, including statistical errors, continued to negatively affect growth by -2.1 points, indicating that a substantial portion of demand was satisfied through inventories, with the adverse impact of inventories increasing significantly compared to the previous quarter. Inventories have been depleted for 16 consecutive quarters. In this context, a balanced demand composition within the economy kept the contribution of consumption at low levels, while the positive impact of net exports—one of the sustainable growth components—increased, although the contribution from investments weakened. Consequently, private consumption and net exports emerged as the primary drivers of growth in the third quarter, while public consumption and investments slightly hindered growth.
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From a production perspective, the agricultural sector made the largest contribution to growth in the third quarter, adding 0.46 points, which was a significant increase from the previous quarter. After contributing a modest 0.11 points in the first quarter and 0.15 points in the second quarter of this year, the agricultural sector’s contribution rose to 0.46 points in the third quarter, marking its highest contribution to growth in the last four years (16 quarters). The construction sector contributed 0.4 points to growth, making it the second highest contributor, although its quarter-on-quarter contribution remained flat. As of the third quarter, this sector has positively impacted growth for the past eight quarters. In contrast, the services sector’s contribution to growth continued to decline, reaching its lowest level since 2020, during the pandemic. This decline suggests that the effects of monetary tightening on demand are becoming increasingly apparent. Meanwhile, the financial sector’s contribution rose from 0.2 points to 0.3 points, though it remains limited. In alignment with stagnant exports and slowing domestic demand, the industrial sector negatively contributed 0.4 points to growth in the third quarter, a more significant decline than the 0.3 points recorded in the second quarter.
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Looking ahead, consumption is expected to fare moderately in 2025 due to the lagged effects of tightening monetary and fiscal policies. Against this backdrop, the economy is projected to grow by 5.1% in 2023, followed by more moderate growth rates of 3.5% in 2024 and 4% in 2025, according to the Medium Term Program (MTP).
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In 2025, domestic demand, particularly consumption spending, may continue to decline in its contribution to economic growth. This trend is largely attributed to the delayed effects of monetary tightening, fiscal discipline, and public austerity measures. However, expectations for accelerated growth in 2025, especially in the US and Eurozone—key markets for Türkiye’s exports—could positively influence net exports. Meanwhile, a more favorable global financial environment, particularly due to interest rate cuts by central banks worldwide, may enhance global economic activity and further benefit net exports. The ongoing credit support in select sectors that promote exports and investments is also anticipated to bolster growth and aid in rebalancing the economy. Furthermore, a robust tourism sector, driven by record-breaking tourist arrivals, suggests a continued positive outlook for tourism in 2025. Conversely, the contribution of investments and the construction sector to growth is expected to rise due to extensive reconstruction and urban transformation efforts and construction investments initiated after the earthquakes in February 2023. To this end, economic rebalancing is likely to prevail. Indeed, preliminary indicators suggest that this rebalancing is underway, aligning with the disinflation process to establish a foundation for sustainable and permanent growth and to propel the growth potential by supporting production, employment, investment, and exports.

In 2024, there was a significant reduction in the current account deficit, driven by decreased energy and gold imports, near-record high net services revenues from tourism and transportation—despite geopolitical tensions affecting these sectors—and a steady rise in exports amid challenging global conditions. The annual current account deficit plummeted from USD 40.4 billion in 2023 to USD 7.4 billion by November 2024 on a cumulative basis. Excluding energy and gold, the current account surplus increased from USD 38 billion in 2023 to USD 54.4 billion on a cumulative basis as of November 2024.
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In June, July, August, September, and October 2024, the current account balance recorded a monthly surplus for five consecutive months, primarily due to a decrease in the foreign trade deficit. This decline was largely driven by reduced imports of energy and gold, along with strong net services revenues, particularly from tourism. As a result of these positive developments, the current account deficit as a percentage of GDP, which was 3.6% at the end of 2023, is projected to decrease to 1.7% by the end of 2024, according to the Medium Term Program (MTP). Recent data suggests that this ratio may improve to below 1% by the end of 2024, reflecting a rebalancing process within the economy. Within the scope of the government’s goal of achieving a balanced and sustainable structure for growth, it will direct resources to areas that generate the greatest added value in a manner that will support investment, production, exports and employment rather than consumption, thus helping to reduce the current account deficit to more moderate levels.
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The number of tourists and tourism revenues that consistently reached new heights played a significant role in reducing the current deficit. Tourism receipts are expected to have a decisive impact on limiting the current account deficit in the coming period. Furthermore, the number of foreign visitors in 2024 has surpassed that of the previous year, with monthly data consistently indicating an upward trend. The MTP has set a tourism revenue target of USD 59.6 billion for 2024, increasing to USD 63.6 billion in 2025. In comparison, tourism revenues reached USD 42.9 billion in 2019, a period characterized by robust pre-pandemic tourism activity. For 2025, a favorable export trend is anticipated to continue, while imports are expected to decline due to ongoing adjustments in domestic demand. This situation is projected to positively impact the current account balance and economic growth. Bolstered by strong tourism revenues, service sector revenues are also expected to help mitigate the current account deficit in 2025.
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Despite economic rebalancing, the labor market performed resiliently. Employment levels have stayed at record highs, accompanied by a decrease in the unemployment rate. In 2024, total employment saw significant growth, particularly in the services sector, driven by a strong tourism sector. In contrast, employment growth in agriculture, industry, and construction was more subdued compared to 2023, primarily due to a slowdown in global growth affecting industrial employment through reduced external demand. During this period, nearly 1 million additional jobs were created, especially in the first 11 months of 2024. The unemployment rate continued its downward trend, remaining in single digits. It improved from an average of 9.4% in the first 11 months of 2023 to 8.7% in the same period in 2024. Looking ahead to 2025, alongside anticipated weak external demand, domestic demand is expected to moderate as the economy continues to rebalance, suggesting a potential partial weakening of employment growth. The strong growth in the services sector could limit the rise in unemployment rates. Although the MTP projected an average unemployment rate of 9.3% for 2024, current data suggests that the actual rate may end up lower. The MTP anticipates a slight increase in the unemployment rate to 9.6% on average in 2025. Given that the labor market data indicates ongoing job creation and the pursuit of employment-friendly policies, it is expected that new job opportunities will emerge, keeping the unemployment rate low while fostering sustainable and balanced growth in the near future.
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The ongoing expenses for repairing the damage from the major earthquakes that impacted 11 provinces in Türkiye in 2023, along with increased budget expenditures driven by high inflation, have significantly influenced the 2024 budget balance outlook. The Central Bank of the Republic of Türkiye’s implementation of a tight monetary policy and macroprudential measures in 2024 has been crucial in advancing the disinflation process. Additionally, elevated inflation levels have contributed to nominal increases in revenues. As a result, expenditures surged in 2024 due to earthquake-related costs and the inflationary environment. Revenues also increased significantly, supported by relatively strong economic activity and tax adjustments; however, the revenue growth was outpaced by expenditure increases, resulting in a substantial rise in the budget deficit. Nonetheless, revenues reached 92% of the target from the beginning of the previous year until November, while expenditures were limited to 82% of the target. This favorable outlook suggests the possibility of closing the year with a budget deficit better than the MTP projections, despite the rise in expenditures.
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The cumulative budget deficit reached TL 1.28 trillion in the first 11 months of last year, representing only 59.5% of the MTP target of TL 2.15 trillion for the entire year. This indicates that there is significant room in the budget for the remainder of the year, supporting the expectation that the budget deficit will remain below the targeted level by year-end. In 2023, the central government budget deficit to GDP ratio stood at a high 5.2%. While spending for the reconstruction of earthquake-damaged regions and addressing the negative impacts of earthquakes will remain substantial in 2024, the MTP projects a decrease in this ratio to 4.9% by the end of 2024, thanks to comprehensive austerity measures introduced by the government since the second quarter of last year, effective revenue policies, and efforts to reduce informality. Excluding earthquake-related expenditures, which accounted for 3.6% of GDP in 2023, the budget deficit to GDP ratio was a much lower 1.6%. The budget deficit to GDP ratio, excluding earthquake expenditures, remains well below the Maastricht criteria of 3%, which is used for international comparisons. This suggests that fiscal discipline is being upheld, and the ratio is expected to remain similarly low in 2024, excluding earthquake expenditures. The MTP forecasts an improvement in the central government budget deficit to GDP ratio to 3.1% in 2025 and a further decline to 2.8% by the end of 2026, staying below the European Union’s Maastricht criteria of 3%. This is anticipated as the government continues to maintain fiscal discipline in public spending to support the disinflation process, alongside effective revenue policies and a reduction in large earthquake-related expenditures.
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In 2024, various factors—including wage increases, higher tax rates, administered and directed prices, food prices, inflationary rigidity in services (particularly rent prices), and a relatively strong domestic demand outlook—will contribute to driving CPI inflation, particularly in key expenditure categories such as housing, food, restaurants and hotels, and transportation. Developments in pricing behavior contributed to widespread inflationary pressures, while robust economic growth further intensified demand-related pressure on CPI inflation. Additionally, producer prices remained lower than consumer prices and global commodity prices, which are influenced by supply-side factors. This situation, coupled with a slowdown in the global economy, helped to mitigate the rise in inflation.
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In 2024, alongside its strict monetary policy and macroprudential measures, the Central Bank of the Republic of Türkiye (CBRT) implemented selective credit and quantitative tightening decisions to bolster the monetary tightening process, which was crucial for advancing disinflation efforts. During this transition period, particularly in the first half of 2024, the CBRT introduced effective tools aimed at combating inflation and addressing its underlying causes. In May 2024, annual inflation peaked at 75.45%, the highest level recorded in the previous year, primarily due to the low base effect. However, it began to decelerate in June, aided by a favorable base effect, delayed impacts of monetary tightening steps, and strengthened fiscal discipline, marking a shift towards disinflation. Furthermore, these measures helped reduce exchange rate volatility and enhance predictability, which in turn mitigated exchange rate pass-through and supported the disinflation process. Despite a diminished effect, several factors have contributed to an annual CPI (Consumer Price Index) of 44.38% at the end of 2024. These factors include the ongoing positive base effect, a slowdown in monthly inflation rates, the delayed impacts of monetary tightening steps, efforts to strengthen fiscal discipline, a moderate outlook for domestic demand, stable exchange rates, increased interest in Turkish lira assets, and improved inflation expectations. At the end of 2024, the annual Consumer Price Index (CPI) exceeded both the end-2024 Medium-Term Program (MTP) target of 41.5% and the CPI forecast of 44% from the last Inflation Report published by the Central Bank of the Republic of Türkiye (CBRT). In 2025, a continued slowdown in CPI is anticipated, with the disinflation process expected to accelerate. However, the moderate behavior of exchange rates and reduced volatility, along with wage increases aligned with inflation expectations, may help ease CPI pressures. In 2025, the trajectory of monetary and fiscal policies, both domestically and internationally, along with commodity prices, foreign capital flows, and exchange rate movements, are expected to be key factors influencing CPI. In the MTP, the year-end CPI expectation for 2025 was projected at 17.5%. In contrast, the last Inflation Report released by the CBRT set the 2025 year-end CPI forecast at 21%, within a range of 16% to 26%.
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Throughout 2024, the CBRT implemented effective and decisive measures to combat inflation, while also focusing on strengthening financial stability through fiscal policy, structural reforms, and monetary policy. The gradual monetary tightening initiated by the CBRT in mid-2023 continued into the first quarter of 2024, raising the policy rate to 50% and maintaining it at that level until December. Alongside macroprudential measures, the CBRT also made selective credit and quantitative tightening decisions to reinforce the monetary tightening process. After holding the policy rate steady at 50% for eight meetings in 2024, the CBRT commenced an interest rate cut cycle at its December meeting, reducing the rate by 250 basis points to 47.50%. This decision was influenced by improvements in the underlying inflation trend and last quarter indicators suggesting a sustained slowdown in domestic demand and favorable disinflation levels.

The CBRT has revised its operational framework, deciding to set the overnight borrowing and lending rates with a margin of +/- 150 basis points relative to the one-week repo auction rate, down from the previous margin of +/- 300 basis points. The CBRT emphasized that the policy rate will be determined to maintain the necessary tightness for the disinflation process, considering both inflation realizations and expectations. Additionally, it noted that if inflation trends show continued improvement, there may be opportunities to adjust the policy rate. The CBRT also stated that decisions will be made cautiously and based on meetings that focus on the inflation outlook. Conversely, it reiterated that monetary policy tools will be employed effectively should there be a significant and lasting deterioration in inflation.
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Meanwhile, alongside a year-on-year decline in the current account deficit, the CBRT’s gross reserves have reached historic highs due to increased international investor interest in Türkiye and a growing preference among residents for Turkish lira-denominated assets. International credit rating agencies have continued to upgrade Türkiye’s sovereign credit rating, while the country’s CDS risk premium has declined amid positive economic developments. In particular, the recent recovery of international markets’ confidence in Türkiye, following the country’s removal from the “gray list” at the end of June 2024, is likely to further boost FDI inflows as a long-term and qualified type of foreign capital for financing the current account deficit and positively influence external borrowing costs.