Türkiye

Growth has decelerated to +2.5% y/y in Q1 2026, which led to a revised full-year forecast to +2.7% (from +3.4%) amid weak domestic demand and softer European export markets. The March 2025 İmamoğlu shock, which triggered a lira plunge of ~15%, forced an emergency rate hike to 46% and drained ~USD25bn in central bank reserves, reset the macro trajectory. Consumption is now supported less by credit impulse and more by gold-price wealth effects, as households monetize holdings amid record global prices. Inflation stood at ~32% for three consecutive months in Q2 2026 and is projected to decline toward 28% by year-end, allowing for cautious monetary easing – but the path remains fragile. Premature loosening ahead of any electoral cycle could reignite expectations. External demand from Europe is sluggish, and the real exchange rate appreciation since mid-2023 continues to compress export margins, particularly in textiles, automotive parts and white goods. Tourism provides a partial offset, contributing a monthly services surplus of ~USD5bn. If disruptions caused by conflicts throughout the Middle East have boosted Istanbul’s status as an airport hub, receipts are declining due to the country’s reduced appeal given higher costs and concerns about an escalation of hostilities in the region. Therefore, cyclical risks are tilted to the downside: any further political shock or premature pivot toward stimulus would unwind the stabilization gains that came at such visible cost.

The structural environment remains constrained by the contradiction between Türkiye's scale and ambition on one hand, and its governance deficit on the other. Frequent regulatory changes, administrative discretion and inconsistent enforcement continue to deter long-term capital allocation. State influence in banking, energy and construction distorts competition, while the post-earthquake reconstruction burden (~USD100bn estimated) stretches public finances and logistics capacity across southern provinces. Labor costs have risen sharply in real terms (minimum wage increases of 30-50% annually since 2022) while productivity gains lag, eroding competitiveness particularly against Southeast Asian peers in textiles and automotive components. Skills mismatches and brain drain accelerate as younger professionals emigrate. The business environment is further complicated by communication restrictions during periods of political instability – social media shutdowns during the March 2025 protests affected operational continuity for firms reliant on digital platforms. Judicial independence concerns persist, with contract enforcement and intellectual property protections among the weakest in the OECD area.