Global credit ratings agency Moody’s revised its forecast for Türkiye’s economic growth in 2023 and 2024, its latest outlook update report showed Thursday.

The agency sees Türkiye’s gross domestic product (GDP) growing 4.2% this year, according to its Global Macro Outlook 2023-24 August report, up from its May forecast of 2.6%.

The economy is expected to expand by 3% in 2024, an upward revision from Moody’s earlier forecast of 2%.

The agency listed Türkiye among multiple nations where it says "economic activity in the first half of 2023 outpaced our expectations."

The report came after data on Thursday showed Türkiye’s economy grew by a more-than-expected 3.8% in the second quarter because of strong household spending.

Yet, activity should slow through year-end as election-related stimulus fades and big rate hikes weigh.

On a quarterly basis, GDP expanded 3.5% on a seasonally and calendar-adjusted basis, also outstripping forecasts.

The annual measure, just shy of trend growth levels, was boosted by a more than 10 percentage point rise in household expenditure, driven in part by a currency decline in June and a rebound in inflation that stoked consumption.

Growth was also supported by fiscal stimulus ahead of the May elections, in which President Recep Tayyip Erdoğan extended his rule into a third decade.

Before the vote, the country’s central bank had long slashed interest rates as the government prioritized growth, exports and investment. These cheap borrowing costs also boosted economic activity.

But after the central bank began tightening in June, reflecting a broader U-turn, growth is expected to cool. The bank has raised the policy rate by 1,650 basis points to 25% so far.

Inflation stood at 47.83% in July and is expected to top 55% in August.

Inflation subsequently eased to as low as 38.21% in June but rose again to nearly 48% last month because of the Turkish lira’s decline and the tax hikes.

The central bank said on Thursday that the annual consumer price index (CPI) is likely to hover close to 62% at the end of 2023, the upper bound of a forecast range it gave in its latest inflation report.

In the minutes of last week's Monetary Policy Committee meeting, the central bank said annual inflation will increase significantly in August. The data due on Monday is expected to show it topped 55% last month, according to surveys.

The bank repeated that monetary tightening will be further strengthened as needed in a gradual manner, adding that disinflation will be established in 2024.

Türkiye’s first quarter growth was revised down to 3.9% from 4%, reflecting massive earthquakes that devastated the country's southeast in February, killing over 50,000. Reconstruction should cost more than $100 billion.

Türkiye’s economy bounced back strongly from the pandemic and grew a revised 5.5% in 2022, extending its hot streak of strong domestic demand and exports. That was despite a slowdown in growth for its main trading partners because of the war in Ukraine, which hurt exports in the second half of the year.

Meanwhile, Moody’s noted that it expects tight financial conditions to persist throughout the next year, "tapping brakes on global growth."

Real GDP growth for the G-20 is estimated to slow to 2.5% in 2023 and 2.1% in 2024, from 2.7% in 2022.

"Recession risk in the U.S. has receded, but below-trend output is necessary for inflation to sustainably decline to Federal Reserve's target," said the report.

Moody's raised its 2023 growth forecast for the American economy to 1.9%, from 1.1% in its May outlook.

"China's economy is facing considerable growth challenges, causing us to cut our 2024 growth expectations," the agency said, adding: "We have lowered our growth expectation for 2024 to 4.0% from 4.5%."

"Inflation is declining as expected and will continue to recede over the next year, but risks remain," the report said. "Major central banks will maintain a restrictive policy stance through 2024."

Moody's said upside risks to inflation from tight labor markets and resilient demand will keep the Federal Reserve, European Central Bank, and Bank of England "vigilant."

"As economic activity has by and large held up well this year, elevated core inflation means central banks cannot be certain they have achieved their inflation mandates just yet," it noted.