President Erdogan was re-elected and the Erdogan-led People’s Alliance won a simple majority in Parliament. The macro outlook points to a need to rebalance the economy given that:

(1) the current account deficit has remained on an expansionary path;

(2) total capital flows have remained weak;

(3) there is a major fiscal expansion; and

(4) the extra fiscal burden and the CBT’s supportive stance create further pressure on already elevated inflation.

In this environment, the main policy debate focuses on interest rate policy and whether there will be a return to a more conventional policy setting post-elections. The appointment of Mehmet Simsek as Minister of Economy and Finance shows an intention to return to conventional economic policies, though it is too early to decide the degree of orthodoxy. The signals imply that actions will be taken without delay following formation of new economy management.

Forecast summary

Macro digest 1Q23

Turkish GDP growth came in at 4.0% year-on-year, slightly better than market consensus, on the back of private consumption, government consumption and gross fixed capital formation, while net exports were a drag once again. On a quarter-on-quarter basis, 1Q23 GDP growth was 0.3% after seasonal adjustments, showing some momentum loss compared with a relatively strong reading in 4Q22 of 0.9%.

Moderating sequential performance is attributable to:

(1) a deceleration in household consumption to the lowest growth rate since the last quarter of 2020, also likely reflecting the impact of the earthquake disaster; and

(2) government expenditure turning negative while stocks positively contributed to the headline and investment appetite remained solid.

Early indicators for 2Q23, on the other hand, hint at an acceleration in the GDP expansion on a yearly basis in comparison to 1Q23 given:

(1) realisations of real sector confidence and capacity utilisation reflecting a continued strengthening in manufacturing, leaving the effects of the earthquake disaster behind;

(2) further improvement in PMI to above the first quarter average, while confidence indicators for retail, construction and services show further improvement.

As growth forecasts for 1H23 imply a better-than-expected performance, the macro indicators point to a need to rebalance the economy. In this regard, the assignment of a new economy management team and guidance on policy direction will be key for the outlook, in our view.

GDP growth, on a quarterly basis (% YoY)

PMI and IP (seasonally adjusted, 3m-ma, % YoY)

Annual inflation has remained on its downward path in May thanks to:

(1) TurkStat's implementation of the ‘zero price’ method for natural gas subsidies. Accordingly, the natural gas sub-group saw a monthly price decline of 100%;

(2) the 2003-based index average for May in the last five years pointed to a favourable base effect for this year. Core inflation (CPI-C) rose to 46.6% on an annual basis.

This suggests that the exchange rate and commodity price-driven improvements in core inflation indicators in recent months may have come to an end. The underlying trend for the headline markedly recovered in comparison to the previous month thanks to goods inflation, while the services group has maintained the elevated trend given continuing pressures in rent, catering and telecommunication services. Despite the elections being behind us, at this stage uncertainty about exchange rates and interest rates persists, but it is expected that the new economy management team, led by Mehmet Simsek, will bring about significant changes in the CBT and the monetary and exchange rate policy to be implemented in the short term.

Accordingly, a lira adjustment postelection and potential adjustments in wages and administered prices are likely to weigh on inflation momentum, while a new equilibrium in rates will be key to return to disinflation in the period ahead.

Inflation (% YoY)