BBVA: Turkish Economy Faces a Delicate Balancing Act Amid Growth, Tightening, and Global Uncertainty

BBVA Research has issued a detailed assessment of Turkey’s macroeconomic trajectory, raising concerns that the country may be approaching an inflection point. While the first quarter of 2025 showed strong headline growth, signs of strain are mounting. The report, titled “Turkey – Hard Landing or Not?”, outlines a complex outlook shaped by domestic policy tightening, waning investor sentiment, and external risks such as the global tariff shock.

Q1: Resilient Growth, But Cracks Beneath the Surface

According to BBVA’s proprietary nowcasting model, Turkey’s GDP expanded by 1.9% quarter-on-quarter in Q1 2025, driven primarily by robust domestic demand. Consumption remained solid and private investment was mildly positive, despite tight credit conditions.

However, March industrial production data revealed a weakening trend across all key sectors, including construction, services, and manufacturing. While industrial production rose 3.4% m/m in March, the quarterly gain decelerated to 1.8%, down from 3.4% in Q4 2024.

The services sector posted an anemic 0.1% m/m rise, and construction output declined by 2.5% m/m, pointing to momentum loss in the final month of the quarter. Despite this, quarterly figures for both sectors showed strong performance — construction grew 9.2% q/q, a sharp rebound from 4% in Q4.

Confidence Collapses in April

More concerning were the April sentiment indicators, which saw a sharp drop due to domestic political uncertainty (notably surrounding the detention of Istanbul Mayor Ekrem İmamoğlu) and the escalating global tariff standoff led by the U.S. administration.

• The Manufacturing PMI remained in contraction territory for the 13th month, stagnating at 47.3.

• Capacity utilization fell to 74.6%, the lowest level in two years.

• Business confidence and sectoral expectations worsened across the board, especially for employment in the construction sector.

BBVA’s composite confidence indicator, which historically correlates well with GDP trends, now signals a negative quarterly growth rate in Q2.

Tightening Cycle Bites as Real Rates Surge

Following aggressive monetary tightening by the Central Bank of Turkey, real loan interest rates have climbed to their highest levels in two decades. Although credit growth has not fully contracted yet, BBVA expects the effects of tight liquidity to show more clearly in the coming months.

Short-term overnight interest rates have been guided near the policy rate of 49%, supported by macroprudential measures. Policy continuity is expected at the June 19 Central Bank meeting, but some observers believe that an interest rate cut might be discussed—dependent on May inflation data.

Private Consumption: Slowing, But Not Collapsing

While private consumption remained positive in Q1, BBVA notes a gradual deceleration:

• Retail sales grew 3.2% q/q in Q1 (down from 3.7% in Q4)

• Card spending softened mid-quarter, but April saw a slight rebound

• April-May indicators suggest weaker goods and services consumption, reflecting waning disposable incomes and high borrowing costs

BBVA’s consumption nowcast shows annualized growth approaching 0% in Q1, partially due to calendar effects.

Employment Signals Mixed

Official data showed a 1% quarterly drop in employment in Q1 2025, though total hours worked rose, suggesting productivity gains and some resilience in labor-intensive sectors.

The headline unemployment rate fell to 7.9% in March, averaging 8.2% for the quarter. However, the broader underutilization rate—which includes discouraged and part-time workers—climbed to 28.3%, indicating continued fragility in labor market dynamics.

Fiscal Signals and Risk Metrics

On the fiscal side, BBVA highlights a mild deceleration in non-interest government spending as a possible first sign of fiscal consolidation. However, the report cautions that Turkey’s growth outlook remains highly sensitive to policy consistency, external financing conditions, and investor confidence.

Encouragingly, CDS spreads and long-term bond yields remain stable, and the exchange rate has held firm. However, after $10 billion in capital outflows, foreign investors have only tentatively returned to Turkish equity and bond markets.

Revised Outlook: Still 3.5%, But Risks Skewed Downward

BBVA maintains its full-year 2025 GDP forecast at 3.5%, but with a strong downside bias. Key determinants for the second half of the year will include:

• The degree and duration of monetary tightening

• Clarity around the government’s fiscal discipline

• Spillover effects from global trade wars and capital flow volatility

Bottom Line

BBVA’s research suggests that Turkey is not yet headed for a hard landing, but the window for a “soft landing” is narrowing. The coming months will be crucial in determining whether the economy can glide through the turbulence—or stall midair amid tightening credit, eroding confidence, and global headwinds.