COMMENTARY: Turkey’s Economy in the Shadow of War
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The war triggered by Israeli and U.S. strikes on Iran is expected to affect Türkiye’s economy through higher energy costs, tighter financing conditions and disruptions in trade. The Turkish economy already faces high inflation, weakening industrial capacity and strong dependence on foreign capital, making it vulnerable to external shocks. Recent inflation and growth data highlight the fragility of the economic environment even before the full impact of the regional conflict is felt.
Inflation Already Overshooting Targets
According to the latest data released by the Turkish Statistical Institute (TÜİK), consumer prices rose 2.96% in February, pushing cumulative inflation for the first two months of the year to 7.95%.
Annual inflation climbed again to 31.53%, highlighting the persistent price pressures facing the Turkish economy.
These figures suggest that the Central Bank of the Republic of Türkiye’s 2026 inflation target of 16% has already become unrealistic only two months into the year. The central bank itself had already revised its forecast range upward to 15–21% earlier in the year.
Market expectations had previously placed year-end inflation around 25%, but the rising cost of energy triggered by the Middle East conflict could make even that figure appear optimistic.
The burden of inflation is being felt most heavily by wage earners and retirees. Salary increases implemented at the beginning of 2026 had already failed to compensate for the previous year’s inflation. With prices rising sharply in the first two months of the year, a large portion of those wage gains has already eroded.
Growth Continues but Structural Concerns Deepen
Another key set of data released last week concerned economic growth.
According to TÜİK, the Turkish economy expanded 3.6% in 2025, reaching a total output of 63 trillion Turkish lira.
While this growth rate remains below Türkiye’s long-term average, it could still be considered relatively strong given that the economy has been operating under tight monetary conditions and high interest rates.
However, the composition of growth raises significant concerns.
The construction sector once again emerged as the fastest-growing segment of the economy. Although reconstruction spending following the devastating earthquakes has played a role in this expansion, the pattern also reflects a broader trend that has characterized the Turkish economy for decades: a heavy reliance on construction and real estate-driven growth.
Perhaps the most striking indicator of this trend is the declining share of manufacturing in gross domestic product.
The manufacturing sector’s share of GDP had increased steadily in the late 2010s, rising to 23.6% in 2022. However, the trend has reversed sharply since then.
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2023: 21%
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2024: 18.5%
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2025: 15.9%
This decline effectively brings the sector’s share back to levels last seen around 2009–2010.
Economists often describe this phenomenon as premature deindustrialization. When manufacturing’s role in the economy shrinks while growth becomes increasingly dependent on construction and services, productivity gains weaken and reliance on external resources tends to increase.
War Inflation Hits Ankara: Rate Cut Hopes Vanish as Iran War Escalates
Energy Prices Could Worsen the Current Account
The regional conflict adds a new layer of risk to this already fragile economic structure.
The most immediate and direct impact of the war is expected to come through energy prices.
Because Türkiye relies heavily on imported oil and natural gas, any significant increase in global energy prices quickly translates into pressure on the country’s current account balance.
Higher oil and gas prices affect the economy through two main channels:
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expanding the energy import bill
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increasing production and transportation costs
These developments not only widen the current account deficit but also contribute to higher inflation across the economy.
External Financing Dependence Raises Risks
Energy prices are only one part of the challenge.
Türkiye’s growth model remains heavily dependent on external financing, which makes the economy particularly sensitive to shifts in global risk sentiment.
During periods of heightened geopolitical uncertainty, international capital flows tend to retreat from emerging markets such as Türkiye.
The current economic model also relies significantly on short-term capital inflows attracted by high interest rates, commonly referred to as carry trade flows.
In such a framework, the risk of a sudden stop in capital inflows could pose a serious threat to financial stability.
Monetary policy will play a critical role in navigating this environment. Maintaining high interest rates could help sustain foreign capital inflows. However, this strategy also places increasing strain on companies that already face financing difficulties.
The combination of high borrowing costs, weak domestic demand and rising input prices could create a challenging environment for many businesses.
Trade and Tourism Channels Also at Risk
If the conflict in the region becomes prolonged, the effects could extend beyond energy markets into trade and tourism.
Potential risks include:
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weakening demand in export markets
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disruptions in maritime transportation
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difficulties in securing imported intermediate goods
These disruptions could directly affect industrial production.
The tourism sector, one of Türkiye’s most important sources of foreign currency, could also be impacted. Rising geopolitical tensions in the region may discourage international travel, reducing tourism revenues and increasing pressure on the current account.
A Fragile Economic Structure
Taken together, these risks highlight the structural vulnerabilities of the Turkish economy.
Among the key factors contributing to this fragility are:
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heavy dependence on imported energy
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growth driven by external financing
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weakening industrial capacity
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persistently high inflation
How resilient the economy will prove in the face of these shocks remains to be seen.
Another dimension of the issue concerns fiscal policy and how the economic costs of the war will ultimately be distributed across society.
Policies aimed at protecting corporate balance sheets and financial stability may lead to increased taxes or reductions in public spending, effectively shifting part of the burden onto households.
Political and Social Implications
Beyond its economic consequences, geopolitical tensions can also shape domestic political dynamics.
Periods of conflict often strengthen national security narratives, which can make it easier for governments to suppress social unrest or labor movements triggered by worsening economic conditions.
As wages continue to lose value and poverty deepens, growing public discontent may emerge. In such circumstances, the atmosphere created by war and geopolitical tension can serve as a powerful political instrument.
The war environment therefore affects not only energy markets and trade flows, but also the broader social and political landscape, potentially making it easier to marginalize economic grievances and labor demands.
Source: Evrensel (quoted commentary)
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