Turkish economy is heading for a sharp slowdown this year having weathered a coup attempt in July and engaged in military operations in Syria but recovering household demand and gradual increases in exports should help GDP pick up over the next two years, the OECD said in its latest Economic Outlook, published on November 28.

Yet, the outlook is subject to above-average special risks, as developments related to increased military activity across the southeastern border and next year's constitutional referendum might affect household and business confidence, and will bear on consumption, investment and growth, the organisation warns. 

The OECD expects Turkish economy to expand by 2.9% in 2016, a downgrade on the previous forecast of 3.9%. Next year's growth estimate was also cut to 3.3% from 3.7% expected respectively as the country continues to face geopolitical headwinds and unsettled political conditions following the coup attempt. Growth is likely to pick up to 3.8% in 2018, the OECD projects.

“Uncertainties are huge but fiscal, prudential and monetary policies are supportive and should spur household consumption from late 2016 onwards,” the OECD said in the report, adding that private consumption is expected to grow 4.1% this year, and 3% next. According to the Paris-based group, for private investment to gain momentum, Turkey needs to restore confidence by implementing high-priority structural and institutional reforms. Gross fixed capital formation will grow only 0.6% this year, gathering pace to 4.9% in 2017, the OECD predicts.

Uncertainties will also affect external funding, the report reads. “The current account deficit, fell from 8% of GDP in 2013 to an estimated 4.6% in 2016. However, external debt roll-over needs are high”. Under the current circumstances, preserving the credibility of economic policy institutions is crucial, the OECD suggests.

On the upside, diplomatic rapprochement with some neighbouring countries may improve trade prospects faster than foreseen, not only for goods and also for tourism and other services, according to the OECD.