Alisher Karimov
The first quarter of 2026 was a period of serious challenges for the Turkish economy. The government continued to pursue a moderately tight monetary policy, which, coupled with fiscal consolidation, was expected to ensure a further slowdown in inflation. However, the military conflict between the U.S. and Iran, which began on Feb. 28, significantly disrupted these plans. Soaring energy prices, rising logistics costs and capital outflows from emerging markets are putting pressure on the country’s balance of payments and foreign exchange reserves.
Macroeconomic indicators and sector dynamics
Turkey’s economic slowdown continued in the second half of 2025. At that time, the country’s GDP growth rate declined from 3.8% in the third quarter to 3.4% year-on-year (YoY) by the end of the year, before falling further to 2.5% in the first quarter of 2026.
The Turkish government sought the goal of a «soft landing» — slowing price growth without pushing key sectors into recession. The Iran war forced the authorities to adapt monetary conditions to geopolitical challenges, creating another obstacle.
The service sector contributed 0.9 percentage points to GDP growth. Telecommunications demonstrated the fastest growth, continuing to attract venture capital and foreign direct investment. Government programs are providing additional support for industrial digitalization and the development of technology parks. By comparison, in 2003, Turkey had only two technology parks with 56 startups operating within them. Currently, there are 114 such parks, home to 12,800 startups.
Retail, transportation, hospitality and food services grew by 3.7% YoY, as rising incomes and increased tourist flows drove demand. In January, further indexation of wages and social benefits took effect, raising the country’s gross minimum wage by 27% to 33,000 Turkish lira (approximately $770). Tourism revenue in dollar terms increased by 4.2% YoY in Q1 2026.
There are no separate statistics for the transportation sector. Still, early-year events suggest the industry will grow dynamically in the coming years, driven by the «Development Road» project and the expansion of Turkish Airlines’ infrastructure.
Agriculture demonstrated a strong recovery (+4.6% YoY) from a low base last year (-0.1% in Q1 2025), when the sector suffered from spring frosts and drought. Increased agricultural output this year helped stabilize the domestic food market and curb rising food prices.
The construction sector showed moderate growth (+3.2% YoY). The sector’s performance moderated following a strong boom in 2025 (+10.8%), when large-scale reconstruction work was carried out in 11 provinces affected by the 2023 earthquake.
Industry was the only major sector to decline: Gross value added (GVA) decreased by 0.8% YoY, with a 1.4% decline in manufacturing. The manufacturing purchasing managers’ index (PMI) has remained below the 50-point threshold since March 2024, as local companies struggle with high domestic borrowing and input costs.
A positive development for Turkish companies could be the possibility of Turkish products qualifying for «Made in EU» status, provided Ankara meets certain conditions. This could allow Turkish goods to be treated on an equal footing with European products.
Fixed capital investment
In the first quarter of 2026, fixed capital investment (FCI) in Turkey recorded a moderate real growth of 3.0% YoY, down from 5.4% a year earlier. Capital investment in construction increased by 3.3%, investment in machinery and equipment by 3.0%, and investment in other assets by 2.3%. In nominal terms, FCI amounted to 4.9 trillion lira ($101 billion) for the quarter.
Monetary policy
After slowing to 30.9% by the end of last year, inflation remained between 30.7% and 31.5% throughout the first quarter. In January, the Central Bank of the Republic of Türkiye (CBRT) cut the base rate by 1.0 percentage point to 37.0%, highlighting progress in slowing price growth. The overnight lending rate was reduced to 40.0%, while the deposit rate was lowered to 35.5%.
Foreign trade and balance of payments
Turkey’s current account deficit in the reporting period grew to $23.6 billion, compared with $14.2 billion a year earlier, due to the deterioration in the trade balance. According to customs statistics, exports decreased by 3.1% YoY to $63.3 billion, while imports increased by 4.6% to $91.9 billion. The final trade deficit for the first quarter amounted to $28.6 billion. Another driver of the current account deficit was the sharp outflow of foreign capital in March 2026, which prompted the Central Bank to undertake large-scale foreign exchange interventions to support the lira.
Fiscal policy
Along with the Central Bank, the Turkish Ministry of Finance also consistently pursued fiscal consolidation in the first quarter. This year, the government aims to reduce the state budget deficit, which stood at 4.7% in 2024 and 2.9% in 2025.
Summary
In the first quarter of 2026, the Turkish economy faced several challenges: external conditions worsened, while domestic authorities continued to combat inflationary pressures. High interest rates limited businesses’ room for maneuver. The urgent need to spend more than $50 billion to defend the lira posed an additional challenge for the Central Bank.
Nevertheless, Turkey’s GDP has continued to grow in real terms for 23 consecutive quarters. Inflation is also easing. This suggests that the country’s economy is gradually emerging from the crisis.
Source: https://kz.kursiv.media/en/2026-09-04/engk-tank-external-pressures-weigh-on-turkeys-economic-growth/
