The European Commission cut its 2015 growth forecast for the Turkish economy to 3.2% from a previous 3.5% and it slashed the 2016 GDP growth forecast to 3.7% from a previous 4%.

The economic slowdown, which started in the spring of 2014, has turned out to be more protracted than previously expected, said the Commission on May 5 in the spring issue of its economic forecasts.

The government expects the economy to grow 4% this year after expanding 2.9% last year.

One downside risk to this forecast is the possibility of a renewed sell-off in Turkish financial assets when the Federal Reserve starts raising its policy rate, says the Commission, adding that another risk is a renewed worsening of the conflicts in the Middle East and Ukraine.  

Private consumption expenditure is likely to recover from last year's sluggishness in the context of the lower oil price and stronger employment growth, according to the Commission which also argues that the recent easing of monetary policy should provide some stimulus to consumption through lower bank lending rates although the macro-prudential measures from 2013-14 will continue to restrain household borrowing. Gross fixed capital formation is projected to increase moderately over the forecast period in view of the improving prospects for consumer demand and lower interest rates and production costs, says the Commission.

The Commission expects Turkey’s exports to be hurt by lower energy prices which tend to suppress growth in many of the country’s traditional markets (Russia, Middle East) and imports to be stimulated by improving terms of trade. Consequently, the contribution from net exports to GDP growth is projected to turn negative again, concludes the Commission.

The Commission says that helped by the lower oil price, annual average consumer price inflation is expected to fall to 7% in 2015, but rise again to 7.3% in 2016 as GDP growth approaches its potential. The Commission’s previous inflation forecasts in the winter report had stood at 6.3% for 2015 and 5.8% for 2016. Last week, the central bank of Turkey raised its inflation forecast for 2015 to 6.8% from a previous 5.5%, citing a weak lira and high oil prices. The bank also lifted its 2016 inflation forecast to 5.5% from a previous 5%.