Deutsche Bank forecasts slower growth, lower inflation for Türkiye

Deutsche Bank’s latest report forecasts a slowdown in Türkiye’s economic growth, predicting a 3% expansion in 2024, significantly below the country’s five-year average growth rate of 5%.

The report, authored by Yigit Onay, highlighted declining inflation and improvements in the current account deficit as key developments for the upcoming year.

According to the report, Türkiye’s inflation rate, which soared to 75% in May, eased to 52% by August. Deutsche Bank expects inflation to drop further to around 42% by the end of 2024, although rigid prices in the services sector could hinder a faster decline. Inflation is projected to fall to 23% in 2025.

Current account deficit narrows

One of the key takeaways from the report is the improvement in Türkiye’s current account balance. The 2023 deficit exceeded 4% of gross domestic product (GDP), reaching approximately $45 billion.

However, a combination of lower energy bills and reduced gold demand is expected to shrink the deficit to 1.6% of GDP in 2024. By the end of this year, Deutsche Bank estimates the deficit will narrow to $20 billion.

The report also highlights the positive impact of strong tourism revenues and reduced external vulnerabilities, contributing to a potential upgrade in Türkiye’s credit rating.

Cautious monetary policy

The Central Bank of the Republic of Türkiye (CBRT) has maintained a tight monetary policy throughout 2024, holding interest rates at 50%.

Deutsche Bank predicted that the CBRT would cut rates by 250 basis points each in November and December, ending the year with a 45% interest rate.

Despite signs of economic cooling and falling inflation, the report emphasizes the need for a cautious approach to monetary policy.

Fiscal balance, budget deficit

The report indicated that Türkiye’s public finances will continue to show a deficit in 2024 because of earthquake-related expenditures and rising interest costs.

The budget deficit, which stood at 5.2% of GDP in 2023, is expected to shrink to 5% next year.

The government is planning to reduce public spending, eliminate tax exemptions, and expand the tax base in line with its fiscal discipline objectives.

Exchange rate and foreign reserves

Deutsche Bank projects that the Turkish lira will continue its gradual depreciation, estimating an exchange rate of 36 USD/TRY by the end of 2024 and 44 by 2025.

The report noted that foreign portfolio inflows and a shift from foreign currency to lira among local investors have helped boost the Central Bank’s reserves to an all-time high of $156.4 billion.

Year of economic rebalancing

Deutsche Bank concludes that 2024 will be a year of continued rebalancing for the Turkish economy.

While domestic demand is expected to weaken, the report highlights the positive outlook for external trade and tourism revenues, which should help reduce economic vulnerabilities over time.