Turkish economy outlook 2024

The Turkish economy, one of the largest in the world, is navigating a complex landscape of challenges and opportunities as it moves into the latter part of 2024. Despite the setbacks posed by the COVID-19 pandemic and the devastating earthquakes in early 2023, Türkiye has shown resilience and a capacity for growth. Here, we delve into the current trends in the Turkish economy and explore the opportunities that lie ahead.

Economic growth and projections

In 2023, the Turkish economy experienced a robust expansion, with a growth rate of 4.5%. However, this growth is expected to moderate in 2024, with forecasts suggesting a rate slightly above 3% before picking up again in subsequent years on a stronger basis. This moderation is partly due to tighter financial conditions and subdued economic sentiment, which are expected to impact household consumption.

The Central Bank of the Republic of Türkiye (CBRT) has been instrumental in managing this economic transition. As of September 2024, the CBRT kept the policy rate unchanged at 50%, but signaled that interest rate cuts may begin soon, indicating a shift towards more accommodative monetary policies. This move is part of a broader strategy to normalize macroeconomic strategies and address past imbalances, particularly high inflation.

Inflation and monetary policy

Inflation remains a significant challenge for the Turkish economy. The inflation forecasts for 2024 have been revised, with expectations ranging between 42% and 46% for the year, and then declining to 16%-26% in 2025 and 6%-18% in 2026. The CBRT has maintained its year-end inflation forecasts for 2024 at 38%, with a forecast band of 34%-42% due to increased uncertainties.

To combat inflation, the CBRT has adopted a tight monetary stance, which includes the use of macroprudential measures and quantitative tools. Despite the strong inflation realizations in recent months, the central bank is expected to continue with restrictive policies to anchor inflation expectations.

Fiscal policy and budget outlook

The government’s fiscal policy is also playing a crucial role in stabilizing the economy. The budget outlook for 2024 is in line with the Medium-Term Program (MTP) targets, with a central government budget balance posting a deficit of 100.5 billion TRY and a primary surplus of 48.2 billion TRY in September. The government aims to keep the budget deficit to GDP ratio below 5% in 2024 and 3% in 2025, which is part of a broader effort to ensure fiscal discipline and support economic rebalancing.

External sector and trade

The external sector is another critical area for the Turkish economy. The current account balance posted a surplus of $4.3 billion in August 2024, thanks to strong seasonality, although the foreign trade deficit remained significant at $78.7 billion over the 12-month period ending in September.

The impact of the EU’s Carbon Border Adjustment Mechanism is also a consideration, given the EU’s role as a major market for Turkish exports. This mechanism presents both challenges and opportunities, particularly in terms of transitioning to less carbon-intensive processes and fostering sustainability in the industrial and transport sectors.

Manufacturing and industrial sector

The manufacturing sector has been experiencing a slowdown, with the Istanbul Chamber of Industry’s Turkey Manufacturing Purchasing Managers’ Index (PMI) decreasing to 44.3 in September, signaling the weakest activity since the pandemic period. However, this slowdown came to a halt in September, and while the third quarter saw an acceleration of the slowdown compared to the first half of the year, there are signs of stabilization.

Reconstruction and investment

One of the bright spots in the Turkish economy is the ongoing reconstruction activity following the devastating earthquakes in 2023. This has driven investment growth, which is expected to remain elevated in the coming years. The reconstruction needs are estimated at around $81.5 billion, and this massive investment is likely to have a positive impact on the economy, particularly in terms of infrastructure development and job creation.

Opportunities ahead

• Sustainability and green transition: The need to adapt to the EU’s Carbon Border Adjustment Mechanism and the country’s vulnerability to climate change present opportunities for investing in sustainable technologies and green infrastructure. This could not only reduce the country’s carbon footprint but also attract foreign investment and create new job opportunities.

• Reconstruction and infrastructure development: The reconstruction efforts following the earthquakes offer a significant opportunity for economic growth. This includes not only the immediate reconstruction needs but also long-term investments in resilient and sustainable infrastructure.

• Export growth: With stronger global growth projected for 2025, Turkish exports are expected to gain traction. This presents an opportunity for Turkish businesses to expand their international market presence and contribute to the country’s economic growth.

• Innovation and technology: The Turkish economy has the potential to leverage innovation and technology to drive growth. Investing in sectors such as IT, renewable energy, and advanced manufacturing could help boost productivity and competitiveness.

Recommendations

To fully capitalize on these opportunities, several recommendations can be made:

• Fiscal discipline: Maintaining fiscal discipline is crucial for ensuring sustainable economic growth. The government should continue to aim for a budget deficit to GDP ratio below the targeted levels and explore new revenue sources to support this goal.

• Monetary policy: The CBRT should continue its tight monetary stance to combat inflation, while also being prepared to adjust policies as economic conditions evolve. This includes using a mix of interest rates and macroprudential measures to manage economic activity.

• Structural reforms: Ambitious structural reforms are necessary to address longstanding macro and structural challenges such as high inflation, low productivity growth, and weakening foreign direct investment. These reforms should focus on improving the business environment, enhancing competitiveness, and promoting innovation.

• Sustainability and climate adaptation: The government and private sector should invest in sustainability and climate adaptation measures. This includes transitioning to less carbon-intensive processes, investing in green infrastructure, and implementing broad adaptation measures to mitigate the impacts of climate change.

Conclusion

The Turkish economy is at a critical juncture, navigating through significant challenges while presenting several opportunities for growth. As the economy moderates in 2024, it is essential to maintain fiscal discipline, continue with tight monetary policies, and implement structural reforms to address longstanding issues. The reconstruction efforts, export growth, and transition to sustainable technologies offer promising avenues for economic expansion. By addressing the current challenges and capitalizing on these opportunities, Türkiye can ensure sustainable and inclusive economic growth in the years ahead.