The World Bank on Thursday upgraded Türkiye's economic growth forecast for this year, citing domestic demand and reduced policy uncertainty following the May elections as the main driver behind its revised outlook.
The bank, in its report prepared for the Europe and Central Asia (ECA) region, said the Turkish economy is expected to expand by 4.2%, up from its previous projection of 3.2%.
Excluding Russia and Ukraine, production in the region is expected to grow 3% in 2023, compared to the previous projection of 2.5% made in June, largely because of stronger prospects for Türkiye and Central Asia, it noted.
The upward revision is a result of "reduced policy uncertainty and resilient consumer demand," the institution said in a statement, adding that reduced uncertainty reflects "the positive steps the authorities have taken to normalize macroeconomic policies following the May 2023 elections."
Economic growth, however, is likely to slow in 2024 and 2025 as "domestic demand cools in the face of rising interest rates and gradual fiscal consolidation," it added.
The report came a day after the United Nations Conference on Trade and Development (UNCTAD) raised its forecast for the Turkish economy forecast for this year from 2.6% to 3.7%, respectively.
The World Bank now expects the Turkish economy to expand 3.1% in 2024 and 3.9% in 2025, down from its previous estimates of 4.3% and 4.1%, respectively, made in June.
"At 3.8% year-over-year, the second quarter growth in Türkiye surprised on the upside as well, with consumption expanding at double-digit rates and government spending remaining strong," the institution said in its Europe and Central Asia Economic Update report.
Despite the prolonged effects of the early February earthquakes, Türkiye's economy kept a positive growth streak in the second quarter following a revised growth of 3.9% in the first quarter.
"However, the rate of decline of exports of goods and services increased to 9%, from 2.6% in the first quarter of this year, which, together with a shift toward a tighter monetary policy stance, could limit further growth later this year," it added.
The World Bank stressed that investment growth in Türkiye rose to 5.1% in the second quarter of 2023 due to strong activity in services and construction and reconstruction efforts after the Feb. 6 earthquakes.
However, the bank cited that the current account deficit widened in the first seven months of this year, "up by over 31% from a year earlier, because of the continued strength of imports, including gold, and falling goods exports," it added.
"From June to September, Türkiye's central bank increased its policy rate to 30%, which translates into a cumulative tightening of 2,150 basis points, as the government and the monetary authorities have been pivoting toward more conventional macroeconomic policies to curb inflation," it added.
The report noted that debt and equity portfolio inflows have picked up since the election in May, alleviating pressures on foreign exchange reserves, which rose to $72 billion in early September from $56 billion at the end of May.
The World Bank also revised its economic growth forecast for Europe and Central Asia to 2.4% from 1.4%.
The upward revision reflects "largely better growth in Russia because of a surge in government spending on the military and social transfers, and consumer resiliency and reduced policy uncertainty in Türkiye," the report said.
"The growth projections have also been upgraded for most of the economies of the South Caucasus and Central Asia, as some of these countries absorbed a significant inflow of migrants, businesses, trade and money flows over the last year and a half," it added.
After contracting 29.1% in 2022, Ukraine's economy is expected to expand by 3.5% this year and 4% next year.
The Russian economy is forecast to grow 1.6% in 2023 and 1.3% in 2024 after contracting 2.1% last year.
"The countries of ECA (Europe and Central Asia) are adapting to the turbulent environment of tighter financial conditions, sticky inflation, continued spillovers from Russia's invasion of Ukraine, and the impact of global economic fragmentation," according to the report.
However, the impact of climate change has become "a starker reality" due to record high temperatures, widespread fires, devastating floods and other natural disasters across the ECA and EU, it noted.
