Turkey Revises Economic Outlook for 2025-2027: Balancing Inflation, Growth, and Opportunities

Turkey’s revised economic outlook for 2025-2027 reflects a strategic shift amid high inflation and slowing growth. The adjustments highlight the impact of monetary tightening, which has slowed economic activity while trying to stabilize inflation. Sectors like manufacturing and consumer goods have faced significant pressure, with shrinking demand and profit margins.

By Giulia Interesse

The Turkish government has updated its economic forecast for the 2025-2027 period, marking a strategic shift as it faces heightened inflation and a slower-than-anticipated growth trajectory. The newly released Medium-Term Program (MTP) has raised the inflation target for 2024 to 41.5 percent—up significantly from the earlier estimate of 33 percent—while lowering the 2024 GDP growth forecast to 3.5 percent, down from the previous 4 percent projection.

These adjustments underscore the government’s efforts to stabilize the economy amidst persistent inflationary pressures. However, they have sparked debate among economists about the challenges Turkey will face in managing both inflation control and economic recovery in the coming years.

In this article, we explore the revised economic outlook and examine the key factors behind the government’s updated targets, as well as foreseeable implications.

The state of Turkey’s economy

Turkey’s economy has faced significant challenges in recent years, with growth slowing more than expected in the second quarter of 2024. According to data from the Turkish Statistical Institute (TurkStat), the economy expanded by only 2.5 percent during this period, falling short of the 3.2 percent growth previously forecasted in a Reuters poll. This deceleration reflects the impact of a year-long monetary tightening campaign, aimed at controlling inflation and stabilizing the economy.

The second quarter saw minimal quarter-on-quarter growth of just 0.1 percent, seasonally and calendar-adjusted. Certain sectors, such as construction (6.5 percent), real estate (3.7 percent), and agriculture (3.7 percent), demonstrated resilience, while others, like services, grew at a more moderate pace. Despite the recent slowdown, first-quarter growth was revised downward to 5.3 percent from the initial 5.7 percent estimate, driven by strong domestic demand spurred by a minimum wage hike and inflationary pressures.

Turkey has been navigating these economic hurdles against the backdrop of an inflation crisis, which saw rates peak at 75 percent in May 2024 before dipping to below 62 percent by July. The central bank responded by aggressively raising interest rates from 8.5 percent to 50 percent to rein in inflation. However, the monetary tightening has dampened economic activity, leading to a lower-than-expected growth trajectory.

In light of these challenges, the Turkish government revised its economic strategy through the Medium-Term Program for 2025-2027. The program reflects a more cautious approach, with the government lowering its growth targets and adjusting its inflation projections upwards, acknowledging the need to balance economic growth with inflation control.

Revised economic outlook (2025-2027)

Growth forecast

Turkey’s updated MTP reflects adjustments in growth projections due to rising geopolitical tensions and the ongoing effects of monetary tightening. For 2024, the government lowered its GDP growth forecast to 3.5 percent, down from the previous target of 4%. Similarly, projections for 2025 and 2026 have been revised downward to 4 percent and 4.5 percent, respectively, compared to the earlier estimates of 4.5 percent and 5 percent.

However, by 2027, growth is expected to recover, reaching 5 percent. This cautious outlook underscores the government’s balancing act between stimulating the economy and managing inflation.

Key sectors likely to be impacted by this lower growth trajectory include services and industries sensitive to consumer demand, as the tightening of monetary policy has dampened domestic spending. Construction and real estate may also face slower growth, though these sectors have shown some resilience in recent quarters.

Inflation target

Inflation remains one of Turkey’s most pressing challenges. The MTP raised the inflation target for 2024 to 41.5 percent, a sharp increase from the previous forecast of 33 percent. For 2025, the inflation projection has been revised to 17.5 percent, while 2026 is expected to see inflation ease further to 9.7 percent. By 2027, inflation is anticipated to fall to 7 percent, suggesting a gradual return to single-digit inflation, which remains a key policy goal for the government.

Several factors are contributing to these heightened inflation expectations, including the ongoing depreciation of the Turkish lira, rising global energy prices, and the aftereffects of the earthquakes that struck the country in 2023. Additionally, external economic pressures, such as global inflationary trends, are exacerbating domestic price levels, making the inflation battle more complex.

Reasons behind the revisions

Turkey’s economic revisions stem from both domestic and global challenges. Internally, the country is dealing with the volatility of its currency, ongoing inflationary pressures, and the impact of external debt. Global economic conditions, including rising interest rates in developed economies and fluctuations in energy markets, have further complicated the economic outlook.

Government policy has also played a role in these revisions. The central bank’s aggressive monetary tightening, aimed at curbing inflation, has slowed economic activity, leading to more modest growth expectations. The administration is also working on reducing the current account deficit and strengthening fiscal discipline in the wake of increased spending on earthquake recovery.

Other government measures: Fiscal policy adjustments

In addition to revising its economic targets, the Turkish government has taken further steps to bolster its fiscal policies. As part of the effort to increase tax compliance and combat tax evasion, the Ministry of Treasury and Finance announced plans to publicly disclose the names of entities with unpaid tax debts exceeding TL5 million (US$147,375).

According to Finance Minister Mehmet Şimşek, these lists will be published by the end of 2024 in local tax offices and on the Revenue Administration’s website. This his initiative is aimed at ensuring fairness in the tax system and holding tax evaders accountable.

Notably, businesses operating in regions affected by the devastating Kahramanmaraş earthquakes in February 2023 will be exempt from this disclosure, recognizing the unique challenges they face in recovery. While the move has been applauded for its transparency, critics argue that the focus should also be on ensuring that large corporations, which have historically avoided significant tax burdens, are not excluded from scrutiny.

Economic implications

Turkey’s recent economic slowdown, exacerbated by high interest rates and fiscal tightening, is creating significant challenges for businesses and investors operating in the country. The sharp rise in borrowing costs, from 8.5 percent to 50 percent, designed to tame runaway inflation, has had a cascading effect on industries, particularly manufacturing and consumer goods. With manufacturing activity contracting for the fifth consecutive month in September 2024 and consumer spending cooling, businesses face shrinking demand and tighter profit margins.

For businesses in sectors like automotive and consumer goods, this shift is particularly stark. For instance, car sales fell by 16 percent in July 2024, while demand for durable goods, such as home appliances, has normalized after a period of heightened spending driven by inflationary concerns. These declines signal a broader trend of weakening domestic demand, a critical issue for companies reliant on Turkey’s once robust consumer market.

Investors are also grappling with the implications of these adjustments. Turkey’s previous low interest rate environment fostered rapid economic expansion, but the current high-rate regime signals a prolonged period of restricted liquidity and slowing growth. While the Central Bank’s focus on stabilizing inflation is essential for long-term economic health, businesses and investors must navigate a more restrictive economic landscape in the short term. The monetary tightening is likely to persist, as policymakers remain committed to controlling inflation.

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