OECD Economic Outlook, Volume 2022 Issue 2

Türkiye

GDP growth will moderate from 5.3% in 2022 to around 3% over the projection period. Inflation will decline but remain above 40%. This will dent household purchasing power while heightened uncertainty will hold back investment. Export growth will slow as external demand weakens. The unemployment rate is projected to stay above 10% in 2023. Large external financing needs and low reserve buffers leave the economy highly vulnerable to shocks.

The central bank should raise its policy rate and provide credible forward guidance for a realistic convergence path to the official inflation target to shore up confidence and re-anchor inflation expectations. Measures to shield households from rising energy prices are welcome but should be temporary and targeted to keep fiscal costs manageable. Reducing employment costs and promoting more flexible work contracts would boost job creation in the formal sector.

Growth has been strong, but vulnerabilities are rising

Real GDP grew by 7.5% in the first half of 2022 (year-on-year), one of the fastest growth rates in the OECD. Buoyant private consumption has been driven by favourable labour market developments as labour force participation returned to pre-pandemic levels. Exporters have been able to exploit opportunities from disruptions of Asian supply chains, and tourism has fully recovered in 2022. However, investment activity has been subdued and macroeconomic imbalances have risen. The current account deficit has widened due to increased energy imports, and consumer price inflation reached 85.5% and producer price inflation 158% by October 2022. The minimum wage was raised by 30% in July, six months after a 50% increase. Lira depreciation has raised import price pressures. Monthly domestic indicators such as electricity production suggest that economic activity is decelerating.

Türkiye

1. Producer price index refers to domestic industrial activities.

2. The last data point refers to 14 November 2022.

Source: OECD Main Economic Indicators database; BIS; and CBRT.

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Türkiye: Demand, output and prices

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The government has introduced measures to shield vulnerable groups from rising energy and food prices. Households in the lowest decile of the income distribution spend nearly 70% of their budget on food and housing. The number of households receiving energy assistance has doubled to 4 million and electricity tariffs for low-consumption households have been cut. Non-targeted price support measures, such as tax cuts on energy and the abolition of some electricity fees, have also been introduced and will continue throughout the projection period. Türkiye imports 99% of its gas and 93% of its oil, leaving the economy exposed to energy supply disruptions and price volatility.

Financial conditions and fiscal policy remain supportive

Despite high inflation, the central bank has reduced its base rate by 8.5 percentage points since September 2021 to the current level of 10.5%, with Türkiye the only OECD country to have lower policy interest rates during this period. The policy rate is expected to remain at the current level over the projection period. At the same time, the authorities have tightened macroprudential and collateral requirements. Since April, the reserve requirement ratio has increased from 10% to 30%. Consequently, lending rates have increased, although they vary considerably as collateral requirements differ according to the type of loans. For example, commercial loan rates are around 18% and even lower for exporting companies, while consumption loan rates are above 30%. Despite these measures, lending rates for all types of loans remain negative in real terms. Fiscal policy will remain supportive over the projection period with support measures for energy consumers and ambitious state-subsidised social housing projects.

Economic growth will moderate

Economic growth is projected to slow to around 3% per annum on average in 2023-24. Weak external demand and persistent geopolitical uncertainties will weigh on investment and limit export growth. At the same time, household consumption will slow considerably as persistently high inflation will dent household purchasing power. Inflation is projected to decline, in part due to base effects, but remain above 40% over the projection period, reflecting a gradual pass-through of the recent lira depreciation and wage increases to consumer prices.

Risks are high and tilted to the downside. The adverse effects of Russia’s war of aggression against Ukraine on prices and economic activity could rise. A complete cessation of energy exports from Russia to Europe could significantly affect Türkiye’s main trading partners and thus weigh on exports. Commodity prices could be higher than projected, adding pressures on inflation as Türkiye is heavily dependent on imported oil and gas. Further significant minimum wage increases could also trigger additional wage and price pressures. A negative confidence shock due to widening macroeconomic imbalances could trigger a disorderly adjustment process involving stronger currency depreciation and spiralling inflation.

Strengthening the macroeconomic policy framework and introducing structural reforms would increase economic resilience

The central bank should raise its policy rate and provide forward guidance stressing its intent to achieve the official inflation target of 5% to shore up confidence and re-anchor inflation expectations. The government should continue to protect households from rising living costs, but this support should be temporary and targeted on the most vulnerable to contain fiscal costs, and be designed to maintain price signals. To create more and better jobs and improve productivity, rigid labour regulations should be eased, and the role of active labour market policies should increase. Given its heavy dependence on oil and gas imports, Türkiye should continue to improve energy efficiency and diversify its supply sources.