Turkey Economy Slides Into Recession Ahead of Rates Decision

Turkey entered a technical recession in the third quarter as industrial production plunged, providing more evidence to the central bank as it ponders whether to start cutting interest rates next month.

The $1.3 trillion economy shrank by 0.2% quarter-on-quarter, the second consecutive decline after the previous period was revised to a contraction, according to data released by the state statistics agency on Friday. Third-quarter annual growth came in at 2.1%, below the 2.5% expected by economists surveyed by Bloomberg. 

The annual growth rate is down sharply compared with a robust first quarter and pre-pandemic average of above 5%, and reflected the high-interest rate environment that’s been in place for much of the year. 

Monetary easing cycle

“We expect the reading to support our call for the Central Bank of the Republic of Turkey to launch a monetary easing cycle at its December meeting,” Selva Bahar Baziki of Bloomberg Economics said in a note after the data was published.

Household consumption expenditure increased by 3.1% year on year, while industrial output fell by 2.2% in the third quarter.

The central bank is battling to control inflation of almost 49% with tight monetary policy, holding its key rate at 50% for eight consecutive months. That’s put the brakes on industrial production, though domestic demand remains resilient in part due to Turks bringing forward purchases of some goods to avoid even steeper prices.

“Consumption remains the strongest contributor to GDP growth, though it has declined on a quarter-on-quarter basis for two consecutive quarters,” said Okan Ertem, senior economist at Turk Ekonomi Bankasi AS. “Along with a slowdown in import volumes both annually and quarterly, this suggests Turkey is nearing an output level that could support the disinflation process.” 

Turkey’s central bank sees inflation finishing this year at 44%, before slowing to 21% by the end of 2025. 

The central bank implied earlier this month that a rate cut could soon be justified due to slowing inflation. The speed of the anticipated monetary easing is likely to have a decisive impact on growth in forthcoming quarters. 

Favoring growth over price stability

President Recep Tayyip Erdogan has in the past favored economic growth over price stability. Since his 2023 reelection, however, a new economic team led by Finance Minister Mehmet Simsek has focused on more market-friendly policies.

With the economy in recession for the first time since 2018, investors may speculate whether Erdogan pivots back toward pro-growth policies. 

Slower-than-expected GDP growth might actually carry a silver lining, according to Emre Akcakmak, a senior consultant at East Capital International AB in Dubai. “Investors are no longer fixated on rapid economic growth; instead, they are prioritizing signs of a soft landing accompanied by a sustained decline in inflation,” he said.