Turkey’s economy loses momentum

Turkey’s economy grew more slowly than expected at the start of 2026, showing that tight monetary policy, high inflation and industrial weakness are beginning to cool domestic demand. Gross domestic product expanded 2.5% year-on-year in the first quarter, down from 3.4% in the previous quarter, with growth increasingly dependent on consumption and services while exports and industry weighed on momentum.

Turkey’s growth undershoots forecasts

Turkey’s economy remained in positive territory, but lost speed. According to Bloomberg, based on official data, growth came in below market expectations. For a country that has long relied on credit momentum, construction, exports and domestic consumption, the slowdown is an important signal: the stabilisation programme is cooling demand, but the cost is becoming more visible for business.

Gross domestic product, the total value of goods and services produced in the economy, rose 2.5% in the first quarter of 2026 from a year earlier. That was the weakest pace in several quarters and a clear moderation from the second half of 2025, when the economy expanded at rates above 3%.

Turkey’s statistical authority TurkStat reported that GDP at current prices reached 16.99 trillion liras, or about $389.6 billion. Current-price GDP reflects the nominal size of the economy before adjusting for inflation, which is why the chain-linked volume index is more important for measuring real growth.

Consumption remains the main driver

Households continued to make the largest contribution to growth. Private consumption rose 4.8% year-on-year despite high inflation and expensive credit. The figure shows that domestic demand has not collapsed, but it no longer looks as overheated as it did during the period of cheap money and rapid credit expansion.

Consumption was supported by wage increases, spending inertia and households’ desire to buy goods before prices rise further. In a high-inflation economy, some consumers try to turn cash into goods, property, cars or foreign-currency assets more quickly in order to protect purchasing power. This supports turnover in the short term, but complicates the fight against inflation.

Government spending rose 2.1%. That added support to the economy, but did not change the broader message: Turkey is entering a phase of more moderate growth, with consumption still holding up while production and foreign trade are weaker.

Industry becomes the weak link

The main negative signal came from industry. Industrial value added fell 0.8% year-on-year. That matters for Turkey because industry is closely tied to exports, employment, foreign-currency earnings and production investment.

Industrial weakness reflects several pressures at once. High interest rates limit working capital and investment. A lira that is strong in real terms hurts exporters’ competitiveness. Demand in Europe, one of the key markets for Turkish manufacturers, remains uneven. Energy prices and geopolitical risks around the Middle East are adding further pressure.

The problem is particularly sensitive for export-oriented companies. If costs in liras rise quickly and foreign-currency revenues do not compensate, margins narrow. In that environment, companies reduce investment, delay capacity expansion and become more cautious in hiring.

Services and communications offset part of the slowdown

Services were more resilient. Information and communication was the fastest-growing sector, with value added rising 9.5%. Other services grew 5.2%, agriculture, forestry and fishing increased 4.6%, while trade, transport, accommodation and food services expanded 3.7%.

This growth structure shows that the economy is leaning more heavily on domestic services, tourism, trade and digital activity. That is positive for short-term resilience because services respond quickly to consumer demand and can support employment. But for Turkey’s external balance, export industries and manufacturing matter more because they generate foreign-currency revenue.

Construction grew 3.2%, while real estate activities expanded 3%. These figures look moderate compared with earlier Turkish construction cycles, when the sector was often one of the main engines of growth. More expensive credit and buyer caution are limiting a rapid return to the old property-led expansion model.

Exports and imports weaken the growth picture

Foreign trade was one of the main constraints on growth. Market estimates point to a sharp fall in exports of goods and services in the first quarter, while imports declined more moderately. For GDP, that is an unfavourable combination: if exports fall faster than imports, net trade subtracts from economic growth.

Turkey depends on imported energy, raw materials and some industrial components. That means imports do not always decline in proportion to domestic demand. At the same time, exporters face competition, currency-related cost pressures and weak demand in some external markets.

For the government and the central bank, this creates a difficult balance. Cooling domestic demand is needed to reduce inflation and narrow the current-account deficit. But an excessive slowdown in industry and exports could hurt employment, tax revenues and investment confidence.

A 37% rate sets the price of stabilisation

The Central Bank of the Republic of Turkey kept the one-week repo rate at 37% in May 2026. The one-week repo rate is the central bank’s key monetary-policy instrument, used to influence funding costs in the banking system, credit conditions and business expectations.

That rate level means the fight against inflation remains the priority, even as growth slows. For companies, it means expensive credit, high working-capital costs and stricter selection of investment projects. For households, it means expensive mortgages, consumer loans and car loans. For banks, it means more cautious assessment of borrower risk.

But an early move to lower rates would also carry risks. If the central bank eases before inflation is firmly on a downward path, the lira could come under renewed pressure and inflation expectations could worsen. Turkey is therefore in an interim phase: growth is already slowing, but inflation remains too high for confident easing.

Inflation remains the main constraint

Annual consumer inflation stood at 32.37% in April 2026, while prices rose 4.18% month-on-month. Consumer inflation measures how quickly the basket of goods and services bought by households is becoming more expensive. In Turkey, it is not just a statistic; it is the central variable of economic policy.

High inflation distorts decisions by companies and households. Businesses revise prices more often, workers demand wage compensation, banks price in risk premiums and investors require higher returns. In such an environment, even positive GDP growth can feel fragile because nominal revenues rise faster than real purchasing power.

The International Monetary Fund projects Turkey’s real GDP growth at 3.4% in 2026 and average inflation at 28.6%. That means the baseline scenario still assumes continued expansion, but with a heavy price burden. For investors, the key issue is not just the size of growth, but its quality: whether it is based on productivity and exports or returns to credit-driven consumption.

The lira remains at the centre of policy

The lira has a dual role. A more stable, or stronger in real terms, currency helps reduce inflation through import prices and expectations. But it can become a problem for exporters if domestic costs rise faster than foreign-currency revenue.

Turkey’s recent policy model has tried to combine disinflation, meaning slower price growth, with continued economic activity. That requires trust in the central bank, sufficient capital inflows and businesses’ willingness to endure a period of expensive money. Any deterioration in the external balance, energy shock or political instability makes the task harder.

That is why weaker first-quarter growth cannot be separated from exchange-rate policy. If authorities support the economy too quickly through credit, inflation risks will rise. If policy remains tight for too long, industry and construction may lose more momentum than expected.

Property feels the cooling in demand

For Turkey’s real estate market, slower GDP growth matters directly. Housing, commercial property and development depend on household income, credit availability, inflation expectations and the exchange rate. When rates are high, buyers delay mortgage transactions and developers become more cautious about starting new projects.

In a high-inflation environment, property remains a capital-protection tool for some households and investors. But rising house prices do not always mean a healthier market. If prices rise more slowly than inflation or sales volumes fall, the real return on property deteriorates. For foreign buyers, citizenship rules, currency dynamics and liquidity in specific locations remain additional factors.

Turkey’s property market has already passed through a phase of rapid growth supported by a weak lira, domestic demand and foreign interest. The new macroeconomic cycle is making the market more selective. Prime assets in Istanbul, Antalya, Izmir and Bodrum may retain demand, while secondary projects with inflated prices and weak infrastructure are becoming more vulnerable.

Investors focus on growth quality

For international investors, Turkey’s GDP data matter not only as a growth indicator, but as a test of the durability of the country’s new economic policy. After a period of unconventional decisions, authorities returned to a tighter monetary line, but its effectiveness depends on whether Turkey can reduce inflation without a sharp fall in production and employment.

ING’s market assessment pointed to a loss of momentum and a result below consensus, highlighting a significant slowdown from previous quarters. That view reflects the broader investor mood: Turkey remains a large, diversified and entrepreneurial economy, but its attractiveness depends on policy predictability.

The market is now assessing not only the pace of GDP growth, but also its structure. Consumption supported by inflation and wages is less valuable than growth in investment, industry and exports. Services and tourism help the economy, but they do not solve the external-balance problem. Real estate remains an important asset, but it can no longer offset weakness in the industrial cycle.

Turkey enters a more difficult phase

A slowdown to 2.5% does not mean recession. Turkey’s economy is still growing, its population remains young by European standards, its domestic market is large and its industrial base is broader than that of many emerging economies. But current growth shows that the old acceleration model based on credit, domestic demand and construction is reaching its limits.

The next stage will depend on three factors: the speed of disinflation, the stability of the lira and the ability of industry to regain export momentum. If inflation continues to slow, the central bank will gain room for more cautious easing. If prices accelerate again, the 37% rate may remain the policy anchor longer than businesses expect.

As experts at International Investment report, Turkey’s weak first-quarter growth is not a failure, but a warning about the price of stabilisation. The economy cannot simultaneously cut inflation quickly, maintain cheap credit, defend the currency and accelerate production. For investors, the main risk is that authorities may shift prematurely toward stimulus if political pressure for growth intensifies. For real estate and business, a slower expansion with falling inflation would be more sustainable than a rapid rebound paid for with another currency and price shock.

FAQ on Turkey’s economy in 2026

Why did Turkey’s economy slow in the first quarter of 2026?

Growth slowed because of high borrowing costs, industrial weakness, export pressure and the effects of tight monetary policy. Household consumption still supported the economy, but production and foreign trade became weaker.

What does 2.5% GDP growth mean?

It means Turkey’s real economic output in the first quarter of 2026 was 2.5% higher than in the first quarter of 2025. The figure remains positive, but it is below the previous quarter’s pace and market expectations.

Why is the policy rate important for Turkey?

A high policy rate helps restrain inflation and support confidence in the lira, but it also makes borrowing expensive for businesses and households. That cools consumption, investment, construction and parts of industrial activity.

How does inflation affect economic growth?

High inflation reduces predictability, forces companies to change prices more often, weakens planning and raises borrowing costs. It may support nominal turnover, but it erodes households’ real purchasing power.

What is happening to Turkish industry?

Industry contracted 0.8% year-on-year in the first quarter. The sector is under pressure from expensive credit, weak external demand, currency-related cost pressures and high production costs.

Why are exports important for Turkey?

Exports generate foreign-currency revenue, support industry and help finance imports of energy, raw materials and equipment. If exports weaken faster than imports, the external balance deteriorates and GDP growth slows.

How does slower growth affect Turkish real estate?

High rates restrict mortgages and developer financing, while weaker growth reduces buyer confidence. At the same time, property remains a defensive asset for some investors in an inflationary environment.

Can Turkey’s growth accelerate again in 2026?

Yes, if inflation slows, the lira stays stable and exports and industry recover. But premature policy easing could bring back inflation and currency risks.