Last week, we shared our forecasts for the global economy in 2024. This week, we will briefly summarize our expectations for the Turkish economy.
Since June last year, we have witnessed a significant change in economic policies and especially in monetary policy, with an almost 180° turn and a rate hike that exceeded expectations. This was accompanied by the removal of some of the numerous regulations under the name of macroprudential policies and simplification steps, resulting in a more predictable market dynamic.
Domestic demand will weaken considerably
The transmission mechanism of monetary policy tightening to loan rates seems to have worked adequately and strongly. Credit costs have risen considerably, and even if access is possible, interest rates have reached levels that those who do not need them would not dare to access. Therefore, a very strong tight policy that restricts the supply side of the economy has come into effect. The impact on deposit rates, which would affect the demand side of the monetary transmission mechanism, was relatively limited and created a controversial situation regarding the real interest rate. Aware of this, the Central Bank is taking steps to push deposit rates even higher, and we expect that it will continue to do so. The next five months will be a period of inflation in Turkey, followed by seven months of disinflation.
In the coming months, we expect annual inflation to reach between 70-75%. We are likely to see 1 or 2 months with monthly inflation between 4-5%. Therefore, the current monthly deposit yield of 3.5% is still not attractive enough in the short term. However, with the steps to be taken by the CBRT (we assume that there will be no reversal), we will reach the point where interest rates will be better than the expected inflation after a while.
In this context, we believe that domestic demand will weaken considerably, especially starting from the second quarter of this year, and that this will pull growth rates down considerably. One reason for this forecast is the strong possibility that inflation and the loss in the purchasing power of wages will have a depressing effect on demand. Exchange rate increases will probably also act as a drag on demand. Services sectors may remain partly more buoyant due to the impact of tourism. The most important factor for growth will be whether exports will come into play. As we all know and as we have often discussed in our previous articles, we think that it will not be possible for exports to support growth unless policy measures are taken to compensate for the loss in the competitiveness of the industry.
However, we are also expecting that the increasing problem with growth will make it more imperative to take steps to support exports and a framework to support exports may emerge in the last quarter of the year. Growth may pick up slightly in the last quarter of the year. However, we think that the main factor that will create expectations for growth is the possibility of interest rate cuts in the last quarter of the year.
Inflation will be around 40%
If monetary policy can be implemented as planned and structural reform steps can be taken to support it, inflation expectations for the end of 2024 could reach 43%, while inflation expectations for the end of 2025 could be between 25-30%. In this case, the Central Bank is likely to cut the policy rate to 30%. If this happens, it will be a significant cut. For example, housing loan interest rates, which are currently around 40%, could fall below 30% and positively affect 2025 expectations in the housing sector. In this context, we expect growth to be at its lowest level in the second and third quarters of the year, and relatively better growth in the last quarter. Our annual growth expectation is around 2.5 percent. If the inflation and growth outlook can be realized within the framework we have mentioned, the current account deficit may decline to between 30 and 35 billion dollars. Capital inflows could reach one of the highest levels of the last few years. However, we anticipate that capital inflows will be predominantly portfolio investments, while direct investments will continue to remain limited.
Fiscal policy support is needed
In conclusion, we would like to emphasize again that we have made the above forecasts under the assumption that the current predictable policies will continue and be supported with the right steps. In order to achieve our forecasts in terms of exports and hence growth, we believe that it will be critical for fiscal policy to be partially flexible and to create room for tax revenues and spending on certain sectors. If fiscal policy does not provide this kind of support, growth rates could decline to a much lower level.
In the event of premature monetary policy easing and failure to implement structural reforms, inflation could go much higher and growth only partially higher. In such a scenario, the cost of fighting inflation on the growth side would be much higher in the coming years.
