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Middle East War Pressures Turkey’s Economy: Growth Risks Rise as Inflation Outlook Deteriorates

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The escalating conflict in the Middle East is placing mounting pressure on Turkey’s economy, tightening financial conditions, accelerating reserve losses, and increasing inflation risks. While growth remains resilient for now, the outlook for 2026 is increasingly fragile as policymakers face difficult trade-offs between stability and expansion.

Tightening Financial Conditions and Reserve Pressures

The regional conflict has already triggered a sharp tightening in Turkey’s financial conditions, with pressure on foreign exchange reserves becoming a key concern.

Estimates suggest:

  • The Central Bank of the Republic of Turkey (CBRT) has conducted implicit FX interventions exceeding $50 billion
  • Between March 1 and March 25:
    • Around $35 billion stemmed from foreign outflows
    • An additional $15–20 billion reflected domestic demand for FX

Authorities have also relied on gold sales and swap operations to support liquidity and stabilize markets.

Looking ahead:

  • Scope for monetary easing appears very limited
  • Fiscal policy is expected to provide only modest support in the near term

Growth Outlook Faces Downside Risks

Turkey’s economy grew by 3.6% in 2025, but the outlook for 2026 is becoming increasingly uncertain.

Current projections indicate:

  • GDP growth of around 3% in Q1 2026
  • A 4% full-year growth forecast, though risks are tilted to the downside

Key pressures include:

  • Rising external financing needs
  • Weakening global risk appetite
  • Higher energy costs

If the conflict deepens or persists, economists warn that growth could slow more sharply than currently expected.

 

Deutsche Bank Turkey Forecast: A “Tougher Macro Path” in 2026

Inflation Risks Re-Emerge

Turkey’s disinflation process was already losing momentum before the conflict, and recent developments have further complicated the outlook.

Current dynamics show:

  • Monthly inflation consistently above 2%
  • Rising energy prices and supply disruptions adding upward pressure

As a result:

  • Year-end inflation is expected to exceed 25%
  • A managed exchange rate framework may be required to contain volatility

The USD/TRY forecast is maintained at 52 by end-2026, although risks remain skewed toward further depreciation if inflation and external imbalances worsen.

Current Account and Capital Flows Under Strain

Higher energy prices and geopolitical uncertainty are weighing heavily on Turkey’s external balance.

Main risks include:

  • Rising energy import costs
  • Capital outflows
  • Potential disruptions to tourism revenues

These factors could lead to:

👉 A widening current account deficit

At the same time:

  • Rapid depletion of CBRT reserves
  • Rising dollarization risks among residents

are adding pressure on the Turkish lira.

 

S&P Raises Türkiye Inflation Forecast as Energy Shock Risks Intensify

Currency Stability and Dollarization Risks

Economists highlight domestic FX demand as a critical variable.

Key concerns include:

  • Sudden increases in dollarization
  • Accelerated reserve losses
  • Sharp currency volatility

This suggests that the CBRT will likely continue:

👉 Tight liquidity management and measures to limit FX demand

A Fragile Macroeconomic Balance

Turkey’s economy is currently navigating a delicate equilibrium:

  • Growth is slowing
  • Inflation risks are rising again
  • The current account deficit is widening
  • FX reserves are under pressure

This creates a difficult policy trade-off:

👉 Supporting growth vs. maintaining price and currency stability

Outlook: Geopolitics Will Be Decisive

The trajectory of the Middle East conflict will remain the dominant factor shaping Turkey’s economic outlook.

In the near term:

  • Monetary policy is expected to remain tight
  • Exchange rate management will stay central
  • Growth forecasts may face downward revisions

Over the longer term, Turkey’s economic resilience will depend on:

👉 Its ability to absorb external shocks and restore confidence in macroeconomic stability

Excerpt from  Garanti BBVA report

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