OECD Economic Outlook, Volume 2024 Issue 1

Türkiye

Real GDP growth is projected to slow from 4.5% in 2023 to 3.4% in 2024 and 3.2% in 2025. Tighter financial conditions and the adverse impact of inflation on purchasing power will subdue household consumption. Investment activity is expected to remain strong partly due to the ongoing reconstruction following the 2023 earthquake. Exports will gradually strengthen reflecting an improved external environment. Inflation peaked at the beginning of this year but will remain elevated over 2024 and 2025.

Fiscal policy is expected to be contractionary following the significant deficit increase in 2023 that was driven partly by earthquake-related expenditures. Monetary policy has rightly become restrictive, and the key interest rate has climbed by a cumulative 41.5 percentage points since May 2023. However, if inflation remains high, further monetary and fiscal tightening may be necessary. Structural reforms can support the efforts to stabilise macroeconomic conditions and raise long-term growth potential. Notably, labour-market reform would help increase high-quality formal job creation.

Despite tighter financial conditions, inflation remains high

Growth remained strong in the last quarter of 2023, driven by robust private consumption. The contribution of net exports to GDP has also been recovering gradually. Despite tighter financial conditions, short-term indicators indicate still solid domestic demand growth at the beginning of 2024. Consumer goods production and retail sales increased at the beginning of the year and activity in the construction sector remained dynamic due to rebuilding and repair in the 2023 earthquake zone. However, inflation remains stubbornly high. Annual consumer price inflation reached 68.5% in March and although inflation expectations have decreased in recent months, they remain well above the inflation target of 5%.

Türkiye: Monetary and inflation indicators

1. Commercial loans excludes overdraft accounts and credit cards.

Source: CBRT; and OECD Main Economic Indicators database.

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Türkiye: Demand, output and prices

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The earthquake and weak foreign demand contributed to a decline in exports in 2023. Robust growth in the tourism sector helped to partly offset the large goods deficit. A record 50 million tourists visited Türkiye in 2023, despite the rise in Middle East tensions since October. Short‑term indicators point to improving demand conditions among Türkiye’s main trading partners and exports have already strengthened at the beginning of 2024.

Monetary and fiscal policy will remain tight

The Central Bank has been tightening monetary policy to restore price stability, With the policy interest rate lifted from 8.5% in June 2023 to the current level of 50%. The monthly maximum interest rate on cash advances from credit cards and overdraft accounts has also been raised. The Central Bank has also taken steps to reduce excess lira liquidity, including lira deposit buying auctions. Nevertheless, further monetary policy tightening may be required if inflation expectations remain unanchored. The projections assume the policy rate will remain at 50% until well into 2025. The government announced fiscal policy tightening as part of a multi-pronged effort to put Türkiye’s economy back on a sustainable path. In January, the tax on petrol was tripled, the standard VAT rate raised from 18% to 20%, and the lower VAT rate for essential items raised by 2 percentage points. The government announced that more measures will follow to reduce the deficit further.

Growth will moderate

Economic growth will ease to 3.4% in 2024 and 3.2% and 2025 as tighter monetary and fiscal policies weigh on consumption. The unemployment rate is projected to start rising, reaching 10% by mid-2025. Total investment will remain strong as earthquake-related reconstruction continues, and as an improved external environment helps restore export growth. The main risk for the projection is spiralling inflation, which could be triggered by untimely policy relaxation or elevated concerns about the credibility and independence of the central bank. Moreover, higher costs arising from further disruptions to transportation and trade could have sizable negative effects on the economy. In contrast, growth could be boosted further by a stronger influx of foreign investment due to credible improvements in fiscal, financial and monetary policy.

Introducing structural reforms would support macroeconomic stabilisation

Monetary policy conditions should remain tight and fiscal prudence is needed until inflation is firmly on a path to target. Fiscal sustainability requires structural reforms to improve spending efficiency and broaden tax revenues. Statutory rates for the personal income tax, social contributions and VAT are broadly in line with OECD averages. However, tax bases remain narrow, partly reflecting a relatively small number of taxpayers. Due to exemptions and discounts, a large share of total tax revenues is waived. Reducing these concessions would help broaden the tax base and increase revenues. VAT revenues are particularly low compared to their potential. Wider structural reforms are needed to support macroeconomic stabilisation and raise long-term potential growth. Notably, comprehensive labour-market reforms, including more flexible labour market regulation and well-designed activation policies, would help increase the creation of high-quality formal jobs. The economy will also need to become more resilient to climate change and energy shocks through adaptation policies, a greening of the energy mix and improvements in energy efficiency.