Inflation in Türkiye is expected to continue its downward path, supported by tight monetary and fiscal policies and falling global energy prices, the European Union's executive commission said Monday in its regular spring forecast.
However, a cold spell in the spring damaged some crops and poses "a risk for food inflation in 2025," the European Commission said in its Spring 2025 Economic Forecast report.
Türkiye's annual inflation slowed to 37.9% in April, according to official data. It marked the lowest level since December 2021 and nearly half its mid-2024 peak of about 75%.
"Tight monetary policy was instrumental in bringing down inflation and inflationary expectations," the report said. It noted that services inflation, although persistently elevated, has shown some signs of moderation.
Although on a downward trend, the commission said inflation is forecast to remain elevated, in the double digits, in the next two years.
The Turkish central bank last month delivered a surprise 350-basis-point interest rate increase to 46% after the lira and assets fell sharply following the arrest of Istanbul Mayor Ekrem Imamoğlu. He was jailed in late March on corruption charges pending a trial.
Before April, the central bank had gradually cut its key policy rate from December and lowered it to 42.5% in early March as inflation eased.
The European Commission said the domestic political developments are expected to have "negative spillovers" on the economy and affect growth in 2025.
It sees Türkiye's economic growth cooling to 2.8% this year before rebounding to 3.5% in 2026.
In the same report, the commission sharply cut its eurozone growth forecast because of global trade tensions sparked by U.S. President Donald Trump's sweeping tariffs.
The forecast for this year for the 20 countries that use the euro currency was cut to 0.9% from the previous forecast in November of 1.3%. The forecast for 2026 was cut to 1.4% from 1.6%.
The Turkish economy expanded by 3.2% in 2024, "broadly in line with expectations," the report said, as tight monetary and fiscal policies curbed domestic demand and helped rebalance growth toward net exports.
"Economic activity contracted in industry, in particular in manufacturing, and slowed down in services, but remained robust in agriculture and construction," it noted.
It said growth picked up in the last quarter of 2024, with a rebound in manufacturing PMIs and stronger real sector and consumer confidence.
Consumer confidence improved further at the beginning of this year, but the tight policy stance has kept a lid on domestic demand and overall economic confidence remained weak, it added.
Household consumption is forecast to grow moderately, around 3.5%, supported by "further improvements in households’ current and expected financial situation," according to the commission.
Investments had increased at the end of 2025; however, high real interest rates and the winding down of post-earthquake reconstruction are expected to constrain the momentum in the near term, it said.
On the external front, the commission expects limited support from trade.
"Export growth is forecast to remain subdued, suppressed by the real appreciation of the lira and lower external demand," while gains from trade diversion "triggered by the increased U.S. tariffs, are expected to be limited."
Imports are projected to gradually rise, narrowing the contribution of net exports to growth, which the commission says is estimated to be close to zero in 2025-2026."
Nonetheless, a combination of trade dynamics and lower energy prices is forecast to keep the current account deficit low," the report added.
The labor market, while "surprisingly" resilient through 2024, is expected to soften, according to the commission.
“Job growth is expected to weaken in 2025 and unemployment to increase, before stabilizing at a higher level," the report says.
The unemployment rate decreased to 7.9% in March, the lowest reading since 2005, according to official data.
The high levels of labor underutilization will remain an "important characteristic" of the labor market, limiting cost pressures, the report said.
The Turkish economy had coped with high geopolitical and domestic risks for several years. But, according to the commission, Türkiye is now "better positioned to face it than in previous years due to a sound policy mix, lower imbalances, and the buildup of buffers."
"Nevertheless, managing the ongoing economic rebalancing is set to remain challenging," it noted.
The 2025 budget aims to reduce the central government deficit to 3.1% of GDP, down from 4.9% in 2024 that was fueled by expenditure related to the devastating earthquakes that struck Türkiye's southeastern region in early 2023.
Those expenditures remained significant at 2.3% of GDP last year, but were down from 3.6% of GDP in 2023.
This year's budget projects a sizable reduction of the budget deficit, mostly reflecting the winding down of earthquake reconstruction spending and the authorities’ determination to support disinflation, said the commission.
But it cautioned that "tax revenue is expected to be lower and the budget deficit higher than the budget plan."
However, government indebtedness is forecast to "remain largely unchanged at moderate levels."
