Turkish economy outpaces expectations, yet trade wars threaten recovery in 2025: BBVA

Spain-based banking giant BBVA reported that Turkey’s economy outperformed stagnant growth projections in the final quarter of 2024, with momentum likely to extend into 2025.

The likelihood of fiscal policy remaining expansionary and lower-than-expected real interest rates would bolster the overall economic outlook, the report noted. However, the BBVA cautioned that potential trade wars pose significant risks to economic growth in the coming year.

In its latest research report on Türkiye released on Friday, BBVA revised its 2024 gross domestic product (GDP) growth forecast to approximately 3% for 2024, while maintaining a 2025 projection of 2.5%, albeit with some upside risks.

Key insights from BBVA

• Sectoral recovery: Although improvements were noted across all sectors, they were not uniform. Industrial production, excluding volatile segments, exhibited only modest gains. Meanwhile, the services sector saw moderate growth in October and November compared to the third quarter.
• Leading indicators: Confidence indices suggested more optimistic expectations than the hard data reflected, pointing to an ongoing recovery in economic activity.
• Domestic demand: A slight easing of tight financial conditions, driven by rising consumer loans and increased real card spending, likely supported domestic demand recovery in the fourth quarter.
• Output gap and inflation: Despite stronger demand compared to supply in 2024, the output gap, which turned negative in the third quarter, did not widen further in the fourth quarter. This limited deceleration in aggregate demand provided weaker-than-expected support in curbing inflation.

Potential trade wars threaten positive outlook

BBVA emphasized that Türkiye’s faster-than-expected recovery, combined with expansionary fiscal policies and favorable interest rates, could lead to limited upward revisions in its 2025 GDP forecast.

However, risks from potential global trade wars and a higher-than-expected terminal rate in the U.S. remain key factors that could impact overall growth prospects, the bank warned.

On the other hand, BBVA also pointed out that Türkiye recorded a significant accrual budget deficit, reflecting higher government expenditures relative to revenues.

The bank postulated that the Turkish government is likely to maintain its expansionary fiscal stance into early 2025, prioritizing economic growth and recovery through increased public spending or financial incentives, even at the cost of widening the budget gap.

Türkiye’s budget deficit hit a record high of ₺2.106 trillion ($59.349 billion) in 2024 but showed improvement by coming in ₺545.79 billion lower than the projected figure of ₺2.651 trillion, the Treasury and Finance Ministry reported on Jan. 15.