The Turkish economy is exhibiting surprising resilience, with growth recorded at 3% for 2024, even amid persistent inflation rates exceeding 40%. Despite the hefty interest rates of 45%, the economy appears to defy conventional expectations of stagnation.
Recent reports indicate Turkey's inflation dropped slightly from 44.4% to 42.1% as of January, marking the lowest peak since reaching 85% during 2022. Yet, this figure remains alarmingly persistent, with prices rising 5% just from December to January. This juxtaposition of growth against adversity raises significant questions about Turkey's economic health.
The inflation crisis is largely attributed to President Recep Tayyip Erdogan's previous influence on the central bank, where he frequently pushed for lower interest rates even as prices started to surge. Resultantly, the Turkish Lira plunged, becoming one of the weakest currencies globally.
Upon appointing new finance officials, including Finance Minister Mehmet Simsek, Erdogan redirected these monetary policies. Simsek initiated tax increases to navigate the newly emerged economic circumstances, including addressing the aftermath of the devastating earthquake met by Turkey two years ago.
By January 2025, Turkey's efforts bore fruit as the central bank commenced pivotal interest rate hikes. They increased rates by 2.5% up to the present 45%, influencing the trend toward reducing inflation rates which are forecasted to stabilize at approximately 20% during the year.
Currently, the Lira is trading around 36 to USD, representing an 18% drop against the dollar over the past year, and 14% against the euro. Given Turkey's heavy reliance on imports—over 95% for energy and various food items—the dwindling value of the currency stings hard.
Remarkably, Turkey managed to hold onto positive economic growth, largely crediting three key factors: demographic advantages, foreign investments, and the unique geopolitical positioning stemming from the Russia-Ukraine conflict. Turkey's population is growing at 0.7% annually, diverging from the global trend of population decline, especially across European nations. This demographic shift provides potential for market expansion and investment opportunities.
Conversely, recent figures reveal the birth rate has dipped below the sustainable level, compelling Erdogan to advocate for policies promoting families, termed the “year of the family.” This demonstrates the urgency of addressing the shifting demographic realities to sustain economic momentum.
The Turkish economy remains attractive to investors, bolstered by increasing provisions from foreign businesses, particularly from China seeking to leverage Turkey's market. Investment influx highlights the allure of Turkey as both customer and supplier within the current geopolitical climate.
Notably, Turkey's trading relationship with Russia has flourished amid the Ukraine conflict. While Erdogan condemned the crisis, he nevertheless maintained trade ties, eschewing sanctions imposed by NATO allies. Effectively, Turkey has taken refuge as both a customer and supplier for Russia, enabling them to circumvent some sanctions and grow trade volumes. Research indicates Turkish exports to Russia surged as economic exchanges escalated 2023.
This coupling of financial growth and geopolitical dynamics establishes Turkey as pivotal within the matrix of European energy supply and trade, especially as it seeks to facilitate gas delivery to Europe from eastern sources, replacing the reliance on southern pipelines, including those from Russia.
Economists speculate about Turkey's future, with the IMF providing forecasts of continued growth shaped by political decisions, upcoming inflation rates, and shifts within the global energy markets. Turkey is projected to maintain steady growth, even if gradually tapering off, as indicated by expectations of 2.6% growth for 2025—the record high substantially eclipsing EU growth projections of only 1.2%.
Despite prevailing caution surrounding the Turkish economy's volatility, players within financial markets continue to monitor developments as the central bank prepares for future policy adjustments. With inflation rates remaining substantial and looming geopolitical risks, Turkey's unique economic resilience brings both optimism and caution to observers.
Turkey's strategic balance between fostering market growth under challenging conditions brings to light significant discussions about sustainable economic health within the region and the rest of Europe.