Türkiye's economy expanded at a less-than-expected pace in the third quarter, official data showed on Friday, as demand ebbed, especially in the services sector, under the weight of tight monetary policy.
The July-September gross domestic product (GDP) grew by 2.1%, the Turkish Statistical Institute (TurkStat) said, compared to market expectations for a 2.6% expansion due to weaker domestic demand.
The major emerging market economy has cooled in the face of a monetary tightening campaign that began in June 2023. The central bank has since hiked rates to 50% from 8.5% in order to lower inflation.
Treasury and Finance Minister Mehmet Şimşek said growth during the disinflation process is following a moderate and balanced course, as predicted.
Şimşek forecasted that the economic activity would bounce back in the second half of next year.
Highlighting that they aim for "sustainable, high, and inclusive growth" while ensuring the welfare of all segments of society, he said the economy grew by 3.2% annually in the first three quarters, reporting that the annualized national income reached $1.26 trillion.
"With the decline in inflation, increased predictability, recovery in our trade partners, improvement in global trade, and supportive global financial conditions, we foresee economic activity gaining momentum from the second half of next year," the minister said in a post on social media platform X.
The July-September GDP dipped by 0.2% from the previous quarter on a seasonally and calendar-adjusted basis, the data showed. That marked a second straight dip and a technical recession in Türkiye.
Annual growth in the second quarter was revised down to 2.4% from 2.5%, the data also showed.
The government sees full-year growth at 3.5%, compared to market forecasts of around 3%.
Slower than forecast economic activity in the third quarter could reinforce growing expectations of a rate cut in December.
Services-related activity pulled overall GDP lower in the latest quarter, while construction and financial services remained elevated on an annual basis, the data showed.
Türkiye's trend GDP growth has been between 4%-5% in recent years, though the rate has cooled throughout 2024.
Efforts to tame inflation taking effect
The contraction from previous quarters "suggests that policymakers' efforts to weaken demand and tame high inflation are taking effect," said Nicholas Farr at Capital Economics.
The government predicts overall GDP growth of 4% next year as part of its campaign to end years of soaring inflation and to adjust the composition of economic growth to more sustainable settings.
Şimşek noted that annual growth continued in sectors other than industry, which constitutes approximately three-quarters of the country's national income.
He emphasized that rebalancing in the economy has been achieved thanks to the government's medium-term program, with domestic demand contributing 1.3 points to growth and net external demand contributing 1.9 points in the first three quarters.
The central bank said separately on Friday that tight financial conditions have helped rebalance domestic demand.
"The labor market outlook shows that the short-term effects of the disinflation process are limited," Şimşek said.
Seasonally adjusted employment increased by 1 million people annually in the third quarter, and the unemployment rate decreased by 0.5 points to 8.7%, he added.
"We have achieved significant gains with our rule-based and predictable policies. Fiscal discipline is strengthening. Increased confidence in the Turkish lira and the inflow of external resources have resulted in significant reserve accumulation," Şimşek wrote.
He highlighted that annual inflation decreased by 26.9 points during the disinflation process that started in June.
Inflation eased down to 48.58% in October from a peak of 75.45% in May.
Earlier this month, the central bank raised its year-end inflation forecasts for this year and next to 44% and 21%, respectively. It previously forecast year-end inflation of 38% in 2024 and 14% next year.
The government anticipated end-2024 and end-2025 inflation of 41.5% and 17.5%, respectively.
Şimşek also underscored that the ratio of the annualized current account deficit to national income decreased by 3.6 points to 0.8% in the third quarter compared to a year ago.
He pointed out that the three major credit rating agencies upgraded Türkiye's credit rating by two notches this year.