Turkey's economy enters 2026 cautiously

Şevket SAYILGAN

Economist 

The Turkish economy, continuing its search for balance amidst currency pressure, high interest rates, and persistent inflation, completes 2025 with 4% growth and enters 2026 with cautious expectations. The Turkish economy is spending 2025 in a "search for balance" shaped by monetary policy tightening, currency pressures, and global recession concerns. While the growth rate continues above 4%, the shadow of foreign currency continues to hover over all balances. This picture creates a complex outlook for 2026, harboring both risks and opportunities simultaneously.

1. Anatomy of 2025: A balance under currency pressure

In the first nine months of the year, the most challenging test for economic management was exchange rate stability. While the Turkish lira lost approximately 15% against the dollar compared to the beginning of the year, currency pressure, despite improvements in reserves, particularly increased costs in energy and intermediate goods imports. According to TÜİK data, second-quarter growth was 4.8%, and the full-year estimate is in the 3.8–4.2% range. This rate, while indicating continued growth, points to a structure heavily reliant on domestic demand. Industrial production increased by around 5%, while agriculture saw a 3% contraction, and construction a 2.1% increase. Export growth remained limited, while import pressure has again widened the current account deficit. The current account deficit is expected to be around 4% of GDP at the end of 2025. Conversely, the unemployment rate still hovers between 8.8–9.2%; youth unemployment is around 17.5%.

2. Production and price stability in the shadow of the exchange rate

In 2025, the depreciation of the TL kept inflation active through the cost channel, while partially supporting production through the export channel. By mid-year, annual CPI reached 58%, and producer prices reached 63%. Increases in energy, food, and service items indicate the continued risk of "persistent high inflation." Industrial production is lively in export-oriented sectors, but a slowdown is observed in investment goods production. Investment expenditures increased by 9% compared to 2024, but in real terms, this increase is quite limited due to exchange rate and interest rate pressures. Firms face financing costs in a high-interest rate environment (policy rate around 50%). This has made "inventory reduction," "forward sales pressure," and "cash flow management" priority issues.

3. 2026 expectations: New era, old problems?

Macroeconomic balances for 2026 are shaped by three main scenarios: base, optimistic, and pessimistic.
You can see the summary table below:

Base scenario: An outlook where the CBRT gradually loosens its tight stance, the exchange rate experiences a controlled depreciation, and growth continues moderately.
Optimistic scenario: Growth approaching the 5% level again with increased access to external financing, strengthened reserves, and a reduction in import dependency.
Pessimistic scenario: The exchange rate exceeding 49 TL and growth slowing sharply in case of increased geopolitical risks (e.g., tensions in the Middle East), energy prices, and capital outflows.

4. Monetary policy and the trajectory of interest rates

The most critical issue heading into 2026: the CBRT's interest rate policy. Keeping the policy rate around 50% throughout 2025 was necessary for inflation control; however, it created significant financing pressure on the real sector. In the first half of 2026, if inflation falls below 40%, an interest rate cut could be on the agenda. In this case, loan volumes could increase, and a revival in housing and automotive sectors could occur. However, early easing carries the risk of creating another exchange rate shock. Therefore, the CBRT's 2026 strategy will be centered on "measured easing + reserve accumulation." This approach can prevent sudden jumps in the exchange rate and support controlled growth.

5. Foreign trade and global effects

As the global economy enters 2026, the US entering an interest rate cutting cycle and China's renewed growth initiative could create opportunities for Turkey in terms of export channels. However, stagnation in Europe and geopolitical risks still create uncertainty. In the first eight months of 2025, exports amounted to approximately 152 billion dollars, and imports to 190 billion dollars. In 2026, according to the base scenario, exports are expected to be 250 billion dollars, and imports 295 billion dollars. Volatility in energy prices and the exchange rate level will be decisive in this balance. Tourism revenues are expected to exceed 47 billion dollars in 2025 and 50 billion dollars in 2026; this could play an important role in narrowing the current account deficit.

6. Households, wages, and social impact

In 2025, real wage increases were insufficient against inflation. The minimum wage increase was 49% in the middle of the year, but price increases eroded it quickly. In 2026, wage increases are expected to continue in an inflation-indexed manner. However, real purchasing power can only recover if inflation falls to 30%. While increases in public spending will support household expenditures, they could challenge budget discipline. Non-interest expenditures in the 2026 budget are expected to exceed 23% of GDP.

7. Corporate front: Profit margins are narrowing

Exchange rate volatility, high interest rates, and weak domestic demand put pressure on companies' 2025 balance sheets. The average gross profit margin for industrial companies decreased from 28% to 22%. In 2026, margins are expected to recover with falling energy costs, reduced foreign currency debt, and improved inventory management. While the exchange rate advantage for exporting firms continues, rising raw material prices limit gains. Therefore, "value-added production and digital transformation investments" will be a priority in 2026.

8. Risk matrix for 2026

9. Conclusion: From shadow to light, or to a new shadow?

Growth continued in 2025, but the shadow of foreign currency still falls on every area of the economy. 2026 will be a "test year" for emerging from this shadow. The key to success lies in three pillars:

1. Exchange rate stability and reserve management,
2. Trust and predictability in investment financing,
3. An industrial policy centered on increasing productivity and digital transformation.

If Turkey can free growth from exchange rate pressure and reduce its dependence on foreign currency in 2026, it can emerge "from shadow to light." Otherwise, the risk of returning to a high inflation – low growth spiral is imminent. In conclusion, the metaphor of "growth in the shadow of foreign currency" will be the key not only for 2025 but also for 2026. The success of economic management depends on its ability to shrink this shadow and create a Turkey that can grow with stability.

This content has been translated using artificial intelligence technology.