Hitting Below Expectations: Turkish GDP Grew by 2.0% YoY in Q1
Bottom Line: Turkish Statistical Institute (TUIK) announced on May 30 that Turkish economy expanded by 2.0% in Q1 2025 backed by private consumption. The growth rate hit below expectations due to the weight of high interest rates, sluggish demand abroad causing weakening exports and adverse geopolitical developments.
Figure 1: GDP (%, YoY), Q1 2020 – Q1 2025
Source: Continuum Economics
After Turkish economy expanded by 3.0% YoY in Q4 2024 supported by private consumption and robust investments, TUIK’s data revealed that the economy grew by a mere 2.0% in Q1 2025. On a QoQ basis, GDP surged by 1% in Q1, down from 1.7% in the previous quarter. Households’ final consumption increased by 2% YoY in Q1, decelerating from 3.9% in Q4. Investments slowed significantly by increasing 2.1% YoY in Q1 after expanding by 6.1% YoY in Q4 2024.
We think one major reason that household consumption has made a lower contribution to growth this quarter was lower-than-expected increase in minimum wage in January. On sectoral front, manufacturing output fell 2.4% from a year ago in the first quarter, while the agriculture sector shrank 2%, partly due to businesses are struggling to manage the prolonged period of high rates and eroded competitiveness.
Speaking about Q1 growth rate which stood below expectations, Treasury and Finance Minister Mehmet Simsek said “Turkish economy remains on track for stable, sustainable growth, supported by a disinflation trend.”
Taking into account that Central Bank of Turkiye (CBRT) signalled in its newly released financial stability report that tight monetary policy remains essential to guiding inflation lower, and noted both commercial and consumer lending have slowed, particularly in foreign currency-denominated loans, following a series of macroprudential measures aimed at reinforcing monetary transmission, we think that high interest rates will continue to pressurize GDP growth. Additionally, adverse geopolitical developments including increases in tariffs and sluggish demand abroad will be the risk factors.
Despite the government targets a GDP growth of 4% YoY in 2025, we feel anti-inflation measures coupled with global uncertainties will likely continue to dent growth in 2025. (Note: IMF and the EU envisage Turkish economy to expand by 2.7% and 2.8%, respectively, in 2025). We think growth will be under pressure in H2 due to high interest rates, contractionary fiscal actions and additional macro prudential policies to fight against the elevated inflation coupled with adverse global outlook.