WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

As expected, GDP growth in Q1 2024 was strong, but high-frequency economic indicators suggest a modest deceleration in domestic demand from Q2 2024. Household consumption grew sluggishly in Q1 compared to the previous quarter, with growth driven primarily by investment, government spending and positive net exports. The tightening of financial conditions and subdued real wage growth are likely to contribute to a further slowdown in domestic demand. In May, annual inflation likely peaked at 75.5%. In response, the central bank maintained the policy rate at 50% for a second consecutive month and introduced further macroprudential measures to control FX loan growth, while increasing reserve ratios for Turkish lira deposits. Despite market optimism about disinflation, substantial structural and institutional challenges remain. Given the current high inflation and interest rates, it is very unlikely that disinflation can be achieved without sacrificing short-term growth. The optimism may be premature, given the historical volatility in President Erdoğan’s policy direction and his government’s reluctance to shift from growth-oriented policies; this suggests that economic rebalancing will take time and patience. Therefore, the decline in inflation is projected to be more modest than initially anticipated by the central bank, and to have only a limited impact on growth. Our forecast for 2024 remains unchanged: 3.4% growth and 59% average annual inflation.