Turkey’s Economy: Is the Soft Landing a Myth?

Is Turkey’s economy truly cooling down, or are persistent domestic demand and data blind spots undermining the Central Bank’s disinflation fight? An expert analysis of the elusive output gap and sectoral divergences by Dr Cagri Sarikaya, Akbank Chief Economist. 

Introduction: Is the Economy Truly Cooling Down, or Were Rate Cuts a Mistake?

Turkey’s powerful tight monetary policy, spearheaded by the Central Bank (CBRT), has effectively utilized a strong Turkish Lira (TL) strategy to largely suppress imported inflation. However, the battle against entrenched inflation is far from over. Price pressures continue to stem from the rigidity of inflation expectations and overly strong domestic demand.

As the CBRT prepares for its next interest rate decision, correctly measuring these internal demand pressures is paramount. While the Central Bank believes that expectations are becoming less rigid—a view that some analysts (such as the author of this section Atilla Yesilada) respectfully disagree with—a bigger challenge looms: data scarcity. As CBRT Governor Fatih Karahan has emphasized, the data currently available either measures the contribution of key sectors to economic activity with a significant lag or fails to measure them completely.

Adding to the complexity is the debate over Turkey’s sustainable growth rate (potential growth). While the CBRT estimates this rate to be around 4.5%, chief economists, such as Dr. Çağrı Sarıkaya from Akbank, suggest it may have fallen to as low as 3% (perhaps due to factors like corporate consolidation or structural issues).

It is against this backdrop of deficient data and conflicting views that the Akbank Research Team presented its latest technical assessment.

The Expert View: A Weaker Outlook Than Headlines Suggest

Messages emerging from the International Monetary Fund (IMF) and World Bank (WB) meetings—that the global outlook is “weaker than headline indicators imply”—resonate deeply with the challenges facing the Turkish economy.

The biggest hurdle for analysts assessing Turkey’s economic activity and demand conditions is the complexity and incompleteness of the available data, particularly within the vast services sector.

Understanding the Technical Terms

Analysis: How Much Has the Economy Cooled Down?

The core focus of the analysis is the technical difficulty in tracking the service sector, which is critical for assessing whether the Turkish economy is genuinely slowing.

1. The Data Scarcity Barrier: The Services Sector Enigma

The largest component of economic activity, the total services sector, accounts for 57.5% of GDP, but only 70% of this share can be tracked on a monthly basis.

• Trackable (40.4% Share): Wholesale/retail trade, transport, accommodation/food services, information/communication, etc.
• Untrackable (17.1% Share): Finance, public administration, education, health, etc.

This significant data gap means that monthly assessments of economic activity inevitably present an incomplete picture.

2. Sectoral Divergence: Two-Speed Economy

The answer to “Is the economy cooling?” heavily depends on which sector you observe:

• Wholesale and Retail Trade (Heating Up): Even when excluding gold, this sector still shows signs of overheating. Demand and activity remain robust.
• Other Service Sectors (Cooling Down): Other services like accommodation, transport, and professional services have been in a cooling (slowing down) phase for some time.

This heterogeneity demonstrates the danger of aggregating data under a single “services sector” heading. However, the analysis notes that even the observed cooling in some sub-sectors might be unreliable due to specific anomalies (e.g., the post-pandemic divergence in the information and communication sector).

3. The Output Gap and Disinflation

The output gap indicator, constructed by aggregating available service statistics with GDP weights, suggests that the economy is not yet in a disinflationary phase.

This is the clearest answer to the main question: The data indicates that an economic slowdown sufficient to control inflation has not yet materialized.

4. The Starting Point is Key (The Mechanical Argument)

The most potent argument presented relies on growth forecasts versus potential growth:

• 2024 Growth Forecast: 3.3%
• 2025 Growth Forecast: 3.5%
• Potential Growth: Debatable (estimated between 3.5% and 4.5%)

Conclusion: If the forecast growth rate (3.5%) is close to the lower-end potential rate (3.5%), the economy has barely cooled at all. If the higher-end potential rate (4.5%) is accepted, the reduction in the output gap over two years is only marginal.

The Core Takeaway: The Degree of Overheating Matters Most

The most critical finding of the analysis is this:

The starting point before the slowdown—that is, how overheated the economy was—is more important than the speed of the slowdown itself.

If one accepts that the economy was severely overheated under the “ultra-loose policy stance” prior to the general election, then a 3.3%-3.5% growth rate, even if technically a slowdown, may not be sufficient to cool an overheated economy enough.

In summary, if the starting point was a significant state of “overheating” (e.g., a starting output gap much higher than a neutral 2%), the current slowdown is likely inadequate to bring the economy into the “disinflationary phase” required to sustainably bring down inflation. The data, particularly from the services sector, does not yet inspire confidence that the necessary “cold” has been reached.