(Bloomberg) — Turkey’s government trimmed its forecast for gross domestic product in 2025, saying it would have to make concessions on growth in the short-term in order to slow inflation.
The government’s medium-term program revised down its expectation for economic growth next year to 4% from 4.5%. That’s still well above the 3% seen in a Bloomberg survey of 26 economists.
The forecast for this year was cut to 3.5%, down from 4% previously.
Finance Minister Mehmet Simsek said any negative impact of disinflation on growth would be temporary. The priority is to slow inflation to single digits and keep it there, he said at a presentation in Ankara.
Barclays Plc economist Ercan Erguzel said the new targets look “optimistic” despite the downward revisions, and higher than his forecasts of 3% and 3.2% for 2024 and 2025, respectively.
President Recep Tayyip Erdogan has opposed compromising on growth in the past, preferring to boost monetary stimulus at the expense of price stability. That gives the GDP targets political significance as an indicator of how supportive the president is of economic tightening. The program has been approved by Erdogan, Vice-President Cevdet Yilmaz said.
Turkey’s main stock index was down 0.5% as of 3:57 p.m. local time, while the lira strengthened 0.2% against the US dollar.
“I was expecting a revision below 4% because I saw the tight stance in financial conditions continuing in 2025,” said Orkun Godek, deputy general manager of strategy and research at Deniz Invest.
Expectations of rate cuts by Turkey and major central banks may have dominated Turkish officials’ growth expectations, he added.
A policy shakeup last year revived investors’ interest in Turkish assets. The central bank has lifted its benchmark interest rate by more than 40 percentage points to 50% in less than a year.
But bringing inflation under control has proved difficult. Households have elevated price expectations, domestic demand has remained strong and businesses expect inflation to top the central bank’s projections over the next year.
The new program also revised up the 2025 year-end inflation forecast to 17.5% from 15.2%.
The revised forecasts imply an average US dollar-lira exchange rate of 42 in 2025, a 21% depreciation from this year’s expected equivalent, said Ekrem Cunedioglu, director of development policy at Ankara-based think tank TEPAV.
“Either they don’t see an increase in demand for hard currencies or the central bank will continue to suppress the currency,” he said.
Government officials say they don’t have exchange-rate targets and that they support a floating exchange rate.
Investors and economists have sought stronger fiscal policy to complement the monetary stance. The budget deficit was 4.7% of GDP in the second quarter, though officials say that most of it was due to spending related to last year’s massive earthquakes.
The new program revised the budget deficit forecast for next year to 3.1% of GDP, down from the previous 3.4%. For this year, it envisions a deficit of 4.9%. According to Erguzel the fiscal targets were “slightly less ambitious” than their expectation and were a bit higher than what Simsek “communicated previously.”
“It is not clear to us why the medium-term program did not target a figure of 3% or below,” he said.
–With assistance from Ercan Ersoy.
(Updates with Barclays comment starting in fifth paragraph.)
©2024 Bloomberg L.P.
