The Turkish economy is on track for a better-than-expected growth performance this year, according to Fitch Ratings, which also sees higher global expansion than it earlier estimated.
The credit rating agency now expects Türkiye’s gross domestic product (GDP) to expand by 3.5% in 2024, up from its previous forecast of 2.8%, according to its quarterly Global Economic Outlook Report.
Fitch also adjusted its forecast for 2025, lowering it slightly from 3.1% to 3%, and set the 2026 growth expectation at 3.2%.
Türkiye's economy expanded by 5.7% in the first quarter, one of the world's highest growth rates at the start of the year, driven by robust domestic demand despite tight monetary policy.
Growth is expected to moderate during the rest of the year as the central bank's series of aggressive interest rate hikes in the face of soaring inflation weigh on economic activity.
Fitch said it sees inflation, which remains Türkiye’s biggest challenge, ending the year at 43%.
Inflation reached an annual 75% in May, which is said to mark the peak before rate hikes and a relatively stable Turkish lira bring relief.
Authorities have sought to cool domestic demand, the main driver of inflation, and have pledged to do more to prevent the outlook from deteriorating.
Last month, the central bank raised its year-end forecast to 38% as the monetary tightening weighs. Since June last year, it has gradually lifted its benchmark policy rate to 50% from 8.5%.
Fitch sees inflation dropping to 23% and 18% for 2025 and 2026, respectively. The government sees it falling to single digits two years from now.
Fitch has also raised its world growth forecast for 2024 to 2.6% from 2.4% earlier as confidence in European recovery prospects improve, China's export sector revives and domestic demand in emerging markets excluding China shows stronger momentum.
Pivot to global policy easing
It noted the expected pivot to global monetary policy easing, which it says is now taking shape.
It cited European Central Bank's (ECB) recent rate cut, which is expected to be followed by the U.S. Federal Reserve (Fed) and the Bank of England (BOE) in the third quarter.
"But inflation is surprisingly persistent and we now expect global rates to decline at a shallower pace over the next 12-18 months," the report said.
Fitch said the U.S. is slowing but only gradually and kept its 2024 forecast unchanged at 2.1%.
The slowdown in the world's largest economy comes as last year's outsized fiscal impulse fades, imports recover and credit growth remains weak, the agency said.
"But household-sector labor income continues to grow at a decent clip, and robust household finances do not point to a sudden jump in the saving ratio," it added.
Eurozone's growth estimate for this year was revised up by 0.2 percentage point to 0.8%.
"European recovery prospects are on a firmer footing as the terms-of-trade and energy shock reverses, energy-intensive industries start to pick up in Germany and real wages rebound," the agency said.
"Stronger real incomes will boost spending by households with robust financial buffers, while the drag from earlier ECB tightening diminishes."
China's 2024 growth also saw an upward revision to 4.8% from 4.5%, but that is expected to fall to 4.5% in 2025 as exports and government spending decelerate.
Growth expectation of emerging markets excluding China was raised sharply by 0.5 percentage points to 3.7% for this year.
"Domestic demand has weakened in China as the property market collapse worsens and private consumption growth remains anaemic," said the report. "But fiscal policy is being loosened and exports have rebounded, helping real GDP."
Deflationary pressures are, however, widespread, it added.
Rates to fall slowly
The global monetary policy cycle is entering a new phase, in which rates will be falling slowly but to levels that will still be restricting demand, according to the agency.
It expects the ECB to cut rates twice more this year, and the Fed to start cutting rates in September with another cut in December.
"This is later than we had expected, reflecting stalled disinflation momentum in the first four months of the year. But U.S. wage growth is gradually cooling," it noted.
Nevertheless, Fitch said central banks remain cautious about loosening policy too rapidly, particularly in light of high services inflation.
"Pressures from rising labour costs and housing rents and the normalisation of relative price trends are keeping services inflation elevated."
Fitch said it forecasts world growth to edge down to 2.4% in 2024 as U.S. growth slows to a below-trend rate of 1.5% and growth in the eurozone picks up to 1.5%.