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Last Updated on 14/09/2023

The Turkish economy in 2023 stands at a critical juncture, marked by its steadfast efforts to combat the persistent challenge of inflation. As the country navigates through a complex economic landscape, characterized by both domestic and international factors, the issue of inflation has taken center stage in shaping its economic trajectory. In this article, we delve into the state of the Turkish economy in 2023, examining the multifaceted dimensions of its inflationary struggle and the strategies being employed to achieve stability and sustainable growth. From fiscal policies to monetary measures, Turkey’s journey to control inflation is a compelling narrative that not only impacts its own citizens but also resonates globally, reflecting the broader challenges faced by emerging economies in an increasingly interconnected world.

Is the Turkish economy in 2023 having a recession? 

Recession of Turkish economy in 2023

Before affirming whether the Turkish economy in 2023 is facing a recession, it’s essential to understand first its impact on developing countries. Economic downturns are a natural part of the economic cycle. They carry  consequences for both economies and societies.

During a recession, economic activity typically decelerates, leading to higher unemployment rates and decreased incomes for individuals and enterprises. THerefore, governments and central banks frequently implement measures to stimulate economic activity and mitigate the adverse effects of a recession. Nonetheless, these actions may entail their own costs and trade-offs. Similarly, the Turkish government has launched a new set of measurements aiming to enhance the situation of the Turkish economy in  2023.

How effective is the Interest rate reduction to combat inflation? 

Turkish economy qn inflation in 2023

Inflation signifies the gradual increase in the general price level of goods and services over time. It resulted in a decrease in the purchasing power of currency. In Turkey’s case, its distinctive policy measures since late 2021 have set it apart globally. It operated substantial results by the year’s end.  However, When it comes to the Turkish economy in 2023, factors such as the base effect, credit tightening, an anticipated slowdown in Europe, and declining commodity prices may limit the reduction in inflation to around 40%. A decline in inflation is likely to associate with a variety of factors. These factors include interest rate reductions, technical adjustments, external developments, and risk mitigation measures.

Moreover, interest rate cuts can deter inflation by making borrowing less attractive. This  potentially leads to reduce spending and economic activity. Thereby it  addresses demand-pull inflation—characterized by increased demand for goods and services exceeding supply. And this results eventually in higher prices. Technical considerations, like modifications in the method of measuring inflation, can also contribute to a reduction in the inflation rate.

Furthermore, external factors, such as a global economic deceleration or declining commodity prices, can similarly influence the inflation rate. Lastly, measures taken to mitigate risks, such as credit tightening or tax increases, can assist in inflation reduction.

The costs and benefits of interest rate changes on Turkish economy in 2023 

Turkish economy

Lowering interest rates can stimulate growth for the Turkish economy in 2023  by making borrowing more affordable. Thus, it encourages spending and investment. Yet, the consequences of interest rate changes depend on various factors. Policymakers must carefully consider the trade-offs inherent in altering interest rates and determine the most suitable policy mix given specific economic circumstances.

Policymakers often encounter trade-offs between different economic objectives, such as growth and price stability. In some cases, prioritizing economic growth over immediate inflation reduction may be necessary, especially during periods of economic weakness or recession.

 However, enduring high inflation can have long-term repercussions. It can erode confidence in the currency, complicate long-term financial planning for businesses and individuals, diminish purchasing power, reduce demand, impede investment, and lead to slower economic growth and potentially higher unemployment.

We would like to remind that the Turkish Central Bank raised the country’s benchmark interest rate. It increased first in June from 8.5% to 15%. 

Is Economic Growth  possible with high inflation?

Turkish Economy growthMaintaining price stability, and keeping inflation low and stable, is generally accepted as vital for sustainable economic growth and unemployment reduction. High inflation can also reduce purchasing power, reduce demand, obstruct investment, and ultimately stall economic growth, which may result in greater unemployment rates.

In 2022, inflation surged by 65 points while unemployment dropped by about 1 point. During the third quarter of 2022, economic growth reached 3.9%, but the workforce’s contribution to gross value added declined from 29% to 26% compared to the previous year.

In light of these developments, it’s crucial to reflect on the policy choices made. Although short-term growth of the Turkish economy in 2023 may be attainable with high inflation, the long-term consequences can be severe. Inflationary pressures can accumulate, eroding confidence in the currency and potentially leading to even higher inflation in the future. This can be costly to address and can have detrimental effects on long-term economic growth and employment.

Therefore, policymakers in Turkey prioritized price stability as a fundamental element of economic policies. This approach can support sustainable economic growth and mitigate the risks of adverse consequences in the future.

Optimistic indicators for Turkish economy in 2023 

Turkey’s gross domestic product GDP increased significantly between April and June. When compared to the previous year, it increased by 60.7%. According to the Turkish Statistical Institute, it eventually reached TL 5.5 trillion. In addition, economists had earlier predicted that the Turkish economy would increase by 3.5% year over year in the second quarter. The real growth rate, nevertheless, was higher than anticipated. However, this growth rate comes after a 3.9% annual growth rate in the first quarter of 2023 that was later corrected. It’s interesting to note that the Turkish economy went from a 0.1% contraction in the previous quarter to a 3.5% quarterly growth rate in June June.

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