OECD Economic Outlook, Volume 2023 Issue 2

Türkiye

After a strong first half of the year, economic growth is projected to reach 4.5% in 2023, before slowing to 2.9% in 2024 and 3.2% in 2025. Tighter financial conditions, subdued economic sentiment and stubbornly high inflation will moderate household consumption. However, investment growth will remain elevated due to ongoing reconstruction activity following the earthquakes at the beginning of this year. Exports will gain traction in 2025, reflecting stronger global growth. Inflation is projected to decline over the projection period, but will remain considerably high.

Further rate rises are expected as the central bank is now determined to tighten monetary policy as needed until there is a significant improvement in the inflation outlook. Meanwhile, the government is moving ahead with fiscal consolidation measures to stabilise public finances. Accelerating labour supply reforms would help to support the current efforts to stabilise the macroeconomic framework.

Robust growth was supported by domestic demand

Despite earthquake-induced effects, economic activity remained strong in the first half of the year. High growth was driven by strong domestic demand supported by overly accommodative monetary and fiscal policy. Real household consumption growth was one of the highest rates in the last 40 years. The unemployment rate has dropped below 10%. However, forward-looking indicators such as consumer confidence and capacity utilisation suggest a moderation of growth for the second half of the year. Furthermore, inflation remains persistently high and reached almost 60% in October, driven by higher input costs, strong demand, and the depreciation of the lira, which has lost almost one-third of its value since the beginning of the year.

Türkiye: Monetary, inflation indicators

Source: OECD Main Economic Indicators database; CBRT; and BIS, Central bank policy rates.

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Türkiye: Demand, output and prices

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Tourism revenues have helped to reduce the high current account deficit. The number of foreign visitors rose by 12.6% to almost 40 million people in the first 9 months of the year compared to the same period last year. The depleted foreign currency reserves have also started to increase. However, higher energy prices and the slowdown in the global economy could generate pressures on the current account balance, though the start of natural gas production from the Sakarya field will ease these risks somewhat.

Fiscal and monetary policy have become tight

Since June, the central bank has been tightening monetary policy to restore price stability. The policy interest rate has been lifted from 8.5% in June to 40% in November accompanied by strong signalling of further increases until inflation is under control. The projections assume that the policy rate is raised to 45% in 2024. In addition, credit and quantitative tightening measures have been put in place, including lowering the growth limit for commercial, car and all-purpose loans. These steps are welcome. At the same time, the government has started to tighten fiscal policy to restore fiscal sustainability. The budget deficit is expected to be reduced mainly through taxation. Tax on petrol has been tripled, the standard VAT rate raised from 18% to 20%, the reduced VAT rate for essential items such as basic food and textiles increased by 2 percentage points, and the VAT on some cleaning products increased from 8% to 20%. Without these measures, the deficit would have increased substantially. It is important that fiscal discipline is restored as prudent fiscal policy has been an important policy anchor over the past two decades in Türkiye.

Growth is set to moderate

Restrictive monetary and fiscal policy coupled with elevated inflation will moderate private consumption. The labour market will cool slightly as growth eases. In contrast, total investment will remain strong as reconstruction efforts after the earthquake continue in 2024. Export growth will gradually improve in line with the global economic environment. The measures to contain inflation will have an impact, but nevertheless inflation will decrease only gradually and will remain above 20% until the end of the projection period. There is a risk that inflation could become entrenched at high levels if monetary policy were to be relaxed. In contrast, further credible policy improvements in fiscal, financial and monetary policy might improve investors’ sentiment and strengthen growth.

Securing stronger growth

Structural reforms can support the current efforts to stabilise the macroeconomic framework and raise long-term growth potential. Notably, labour-market reform would help increase high-quality formal job creation. Making permanent contracts more flexible and ensuring that statutory minimum wages are affordable for firms will help create more formal jobs, raising welfare as well as fiscal revenues. In addition to the current consolidation effort, the government should systematically monitor risks stemming from contingent liabilities, as they have expanded in recent years, including from public-private partnerships. This raises Türkiye’s vulnerability to shocks. Expenditure reviews should also be undertaken to improve public spending effectiveness.