Developments in the Turkish Economy

Turkish Economy

The Turkish economy demonstrated relatively strong growth performance in 2025, amid a global economic climate characterized by weak growth and high geopolitical risks.

The Turkish economy grew by 2.5% in the first quarter of 2025, 4.9% in the second quarter, and 3.7% in the third quarter compared to the same periods of the previous year. The growth rate for the first three quarters of the year was 3.7%.

In the third quarter, growth was mainly driven by consumption and investment. During this period, private consumption's contribution to growth rose to 3.2 points, increasing compared to the previous quarter and reaching its highest level during the year (previous quarter: 3.0 points). The contribution of public consumption to growth remained limited at 0.1 points. While private consumption, public consumption, and investments supported growth in the third quarter, net exports had a downward effect on growth.

While consumption's contribution to growth increased compared to the previous quarter (from 2.9 points to 3.3 points), there was also a strengthening in the contribution of investments, which are important for sustainable growth (from 2.3 points to 2.8 points). The contribution of inventory changes, which supported growth in the first two quarters, reversed in the third quarter and reduced growth by 1.5 points. Net exports have had a negative impact on growth for the last four quarters, but this negative effect weakened somewhat in the third quarter (-1.3 points to -1.0 points).

When evaluated by production, it was seen that in the third quarter, the service sector, such as trade, transportation, accommodation, and food services, continued to contribute strongly to growth and was the sector with the highest contribution at 1.5 points. This stands out as the strongest contribution from the service sector since the second quarter of 2023. With the continued strong performance of the tourism sector, the service sector has continued to contribute positively to growth for the last twenty quarters.

The industrial sector, on the other hand, with the partial weakening observed in exports, has been the sector providing the second highest contribution to growth with 1.1 points in the third quarter, in line with the acceleration in private consumption. The construction sector ranked third with a contribution of 0.7 points. Its contribution increased compared to the previous quarter. Under this outlook, the construction sector has been supporting growth for the last twelve quarters. The contribution of the financial sector to growth remained relatively limited, at 0.3 points in the second quarter and 0.5 points in the third quarter, following a near-flat trend in the first quarter.

In the agriculture sector, a positive contribution of 0.3 points was observed in the last quarter of 2024, followed by limited negative contributions in the first two quarters of 2025 (-0.02 and -0.20 points) and a marked negative contribution in the third quarter (-1.33 points). The continued effects of the agricultural frost in the second quarter and the drought conditions that became apparent across the country are considered to have played a role in this weakening of agriculture.

Leading indicators such as global PMI data point to a possible partial weakening of the positive outlook on the export side.

Geopolitical risks and uncertainties in global trade policies are expected to continue to limit the contribution of exports to growth through the external demand channel. With the expectation that global commodity prices will continue to trend moderately and domestic demand will stabilize, a more controlled outlook is anticipated on the import side. Following 3.3% growth in 2024, the OVP projects that the Turkish economy will grow at a rate of 3.3% in 2025 and accelerate to 3.8% in 2026, driven by the recovery of trading partners and more supportive global financial conditions.

Regarding the outlook for 2026, despite the anticipated gradual monetary easing, monetary policy is expected to remain relatively restrictive and the macroprudential framework is expected to continue to a certain extent. It is estimated that fiscal discipline and delayed effects of public sector savings measures may keep the contribution of domestic demand to growth at moderate levels. While the CBRT is expected to continue interest rate cuts in line with the slowdown in inflation, gradual easing steps and the macroprudential toolkit may support domestic demand remaining on a controlled path of adjustment consistent with disinflation.

In the US and Europe, particularly Germany, France, and Italy, expectations of a recovery in growth in 2026 are among the factors that could support the net export channel. The improvement in global financial conditions, along with interest rate cuts by global central banks, could strengthen economic activity and the outlook for external demand. Continuing export and investment-focused credit support in selective sectors could also support growth while strengthening balance. Record-high tourist numbers and strong service revenue outlook in tourism indicate that contributions to growth could continue in 2026. Following the earthquakes in February 2023, reconstruction and urban transformation efforts, along with the impact of construction investments, are expected to increase the contribution of investment and the construction sector to growth.

External Balance and Current Account

In 2025, the positive outlook for exports continued, with service revenues showing strong performance, particularly due to the contribution of travel and transportation revenues, and the decline in energy imports supported the external balance. The widening of the trade deficit, driven by the increase in gold imports and the rise in imports excluding gold and energy, led to an increase in the current account deficit compared to the previous year.

The 12-month cumulative current account deficit, which stood at USD 7.5 billion as of October 2024, rose to USD 22 billion in October 2025. The current account surplus excluding energy and gold declined from USD 52.9 billion in October 2024 to USD 46 billion in October 2025.

Despite the increase in the current account deficit, the current account deficit/GDP ratio continued to remain below historical averages. The current account deficit/GDP ratio, which was 0.8% at the end of 2024, is projected to reach 1.4% at the end of 2025 according to the Medium-Term Program (MTP). Current data indicates that the current account deficit/GDP ratio may be close to the 1.3%-1.4% range at the end of 2025.

In line with the goal of achieving more balanced and sustainable growth, directing resources towards areas that will increase investment, production, exports, and employment rather than consumption could support the current account deficit remaining at more moderate levels. In this context, tourism’s performance stands out as a key factor. The Medium-Term Program (MTP) sets a tourism revenue target of USD 64 billion for 2025 and USD 68 billion for 2026. For comparison, tourism revenues stood at USD 42.9 billion in 2019, before the pandemic. The strong outlook for service revenues in 2026 is also expected to continue to support the current account deficit in a limiting direction.

Employment Market

The employment market largely maintained its strong outlook in 2025, in line with the economic stabilization process. While the number of employed people remained close to record levels, the number of unemployed people declined. The strong performance of tourism supporting employment in the services sector, investments in the earthquake zone, and the increase in construction employment due to urban transformation activities contributed to total employment growth. On the other hand, declines were observed in industrial and agricultural employment compared to 2024. The slowdown in global growth and trade tensions is assessed to have exerted partial pressure on industrial employment through the external demand channel.

Nearly 1 million additional jobs were created in the first 10 months of 2025. The unemployment rate continued to hover at low single-digit levels. The unemployment rate, which averaged 8.8% in the first 10 months of 2024, declined to an average of 8.4% in the same period of 2025.

Although weak external demand and continued balancing of domestic demand in 2026 may lead to a partial slowdown in employment, the relative resilience of service sector employment is seen as a factor that could support an improvement in the unemployment rate. The OVP forecasts an average unemployment rate of 8.5% for 2025, and actual figures may close at levels consistent with this forecast. According to the OVP, the unemployment rate is expected to decline slightly to an average of 8.4% in 2026.

Fiscal Balance and Public Finance

In 2025, the continuation of expenditures to repair the damage caused by the 2023 earthquake and the relatively high inflation rate, which increased budget expenditures, continued to be decisive factors in the budget outlook. With inflation supporting nominal revenues, significant increases were recorded in budget revenues.

Revenues reaching 92.8% of the target from the beginning of the year to November 2025, while expenditure remained at 87.5% of the target, strengthened the possibility of a more favorable year-end budget deficit compared to the OVP forecasts. The cumulative budget deficit of TL 1.27 trillion in the first 11 months of 2025, corresponding to 57.6% of the TL 2.21 trillion target set in the OVP for 2025, indicates that there is relative room for maneuver in terms of the budget for the remainder of the year.

While the central government budget deficit/GDP ratio stood at a high level of 4.7% at the end of 2024, this ratio is projected to decline to 3.6% by the end of 2025 in the OVP, despite ongoing earthquake expenditures, due to the impact of austerity measures, revenue policies, and steps to combat informality. Excluding earthquake expenditures, the budget deficit/GDP ratio remained moderate, standing at 2.9% in 2024 and 2.1% as of November 2025. The fact that the budget deficit/GDP ratio excluding earthquake expenditures remains below the EU Maastricht criterion of 3% indicates that fiscal discipline is being maintained. OVP projections indicate that the budget deficit/GDP ratio is expected to decline to 3.5% in 2026, 3.1% in 2027, and 2.8% by the end of 2028. The public debt/GDP ratio continuing to remain at low levels is also among the factors supporting fiscal resilience.

Inflation, Disinflation Process, and Monetary Policy

In 2025, managed/guided prices, food prices affected by frost and drought conditions, rigidity in service inflation, particularly rent and education, and the housing, food, transportation, and restaurants-hotels groups were decisive factors in inflation dynamics. The broad-based trend in pricing behavior has been a factor strengthening inflationary pressures. Producer prices remaining below consumer prices and the moderate outlook for global commodity prices have had a limiting effect on the increase in inflation.

CBRT’s tightening steps, initiated in mid-2023 and continued in the first quarter of 2024, raising the policy rate to 50% and maintaining it at this level for a long time, along with macroprudential regulations and selective credit/quantitative tightening decisions, played a key role in progressing the disinflation process. After annual inflation peaked at 75.45% in May 2024, a slowdown began due to base effects and the delayed impact of the tight policy stance, and the disinflation process commenced. The decrease in exchange rate volatility and increased predictability has been factors limiting exchange rate pass-through and supporting the fight against inflation.

In 2025, the disinflation process continued in general terms, although temporary fluctuations were observed due to cyclical developments and seasonal effects. Although monthly inflation fluctuated and the main trend showed short-term increases in the last quarter of the year, the downward trend in annual inflation regained momentum with the normalization of seasonal effects and the emergence of widespread slowdowns in price increases. The year 2025 closed with the annual Consumer Price Index (CPI) at 30.89%.

The year-end CPI for 2025 exceeded the 28.5% target set in the Medium-Term Program (MTP). It remained above the 2025 interim target (24%) set in the CBRT's previous year-end Inflation Report and fell below the forecast range (31%-33%). Inflation is expected to continue slowing in 2026. Factors that could support disinflation include the expected negative output gap, the alignment of administered/guided price adjustments with targets, the continuation of supply-side measures in the housing, food, and energy sectors, and the moderate course of exchange rate developments. OVP forecasts a year-end CPI of 16% for 2026, while the CBRT's previous Inflation Report maintained the 2026 interim target at 16% (forecast range 13%-19%).

Taking into account the room for improvement in inflation in 2025, the CBRT implemented gradual interest rate cuts while continuing its macroprudential regulations and selective credit and quantitative tightening measures. The CBRT emphasized that policy steps will be determined in line with inflation outcomes, main trends, and expectations, and in a manner that ensures the tightness required for disinflation in line with the intermediate targets. It stated that if the inflation outlook deviates significantly from the intermediate targets, the monetary policy stance will be tightened, the monetary transmission mechanism will be supported by additional macroprudential measures when necessary, and liquidity management tools will continue to be used effectively.

Financial Conditions, Reserves, and Risk Premium

Alongside the relatively moderate current account deficit outlook, increased interest from international investors and a stronger shift by domestic residents toward TL assets have led to CBRT gross reserves reaching historic record levels. Within the framework of the improvement in the macroeconomic outlook and the strengthening of financial stability, international credit rating agencies have continued to upgrade their ratings, and the decline in the country's CDS risk premium has continued.