Turkey's economy is faltering: growth despite record inflation and interest rates!

Turkey's economy is faltering: growth despite record inflation and interest rates!

The Turkish economy shows a mixed picture as it asserts itself in a challenging environment. Loud The press Gross domestic product (GDP) is forecast to grow by 2.8 percent in 2023. However, this upswing is accompanied by a high inflation rate, which was recently at 35.4 percent. However, independent experts doubt the official figures and speak of an actual inflation rate of around 70 percent.

In 2024, the EU Commission expects further growth of 3.2 percent, supported by a positive trade balance and value creation in the construction and agriculture sectors. According to forecasts, consumers are expected to spend 3.5 percent more in the coming years, which could significantly boost private consumption.

Inflation and monetary policy

The challenge of inflation remains problematic given high consumer prices. The EU Commission predicts that inflation could fall to 36.2 percent by the end of 2023 and to 22.7 percent by 2025. These declines are being supported by falling global energy prices, tighter government fiscal management and a reversal in monetary policy, particularly President Erdoğan's appointment of orthodox central bankers who are raising interest rates.

However, the situation remains tense as the International Monetary Fund expects growth of only 2.6 percent for 2025 and the inflation rate was already at 39 percent in February 2025. Erdoğan's change of course to combat inflation contradicts the low interest rate policy of previous years, which led to significant devaluation pressure on the Turkish lira.

Trade Balance and Foreign Investment

Turkey's trade balance shows positive trends with a moderate increase in exports of 2 percent in 2024, while imports fell by 5 percent. With an EU share of 40 percent of Turkish exports, the CO₂ border adjustment that the EU is planning is a central issue for Turkish exporters. This development could particularly affect the competitiveness of German suppliers, as German deliveries in 2024 were reduced by 6 percent to $27 billion.

Despite the challenges, many companies are recognizing new opportunities, especially export-oriented companies that are planning to expand capacity. Surveys also show that 50 percent of German companies in Turkey rate the business situation as good and 43 percent expect stable development. However, new foreign investors are reluctant to enter the market, reflecting uncertainty about future economic conditions. Between January and October 2024, foreign direct investment was $4.7 billion, with the largest inflows coming from the Netherlands, Germany, USA, England, Ireland and Azerbaijan.

Economic challenges and perspectives

In addition to the economic uncertainties, financing bottlenecks also have an impact. Smaller and medium-sized companies are particularly affected, and restrictive monetary policy is exacerbating financing difficulties. The weak lira makes foreign loans more expensive, which further inhibits economic activity. Observers also expect possible key interest rate cuts in the second half of 2025.

Finance Minister Şimşek's austerity measures, which impose a strict austerity program for public institutions, show how serious the situation is. The focus is on reducing expenses and avoiding new projects except absolutely necessary ones. These measures reflect the need to regain economic balance while at the same time increasing pressure on budgets from persistently high inflation.

In summary, Turkey faces significant economic challenges but also offers opportunities, particularly in the areas of export and consumption. The developments in monetary policy and the reactions of the international market will be crucial for the future stability and growth of the Turkish economy.