Turkey faces stark trade-offs as economic rebalancing stumbles, William Jackson of Capital Economics said on August 11 in a note to investors titled “Turkey’s economy still struggling to rebalance”.

The country’s attempt to steer its economy toward sustainable growth is running into increasingly difficult terrain with economic policy facing a sharp trade-off between combatting stubborn inflation and fixing external imbalances.

While Ankara has managed to navigate the recent global energy shock without suffering severe balance-of-payments crises, Capital's chief emerging markets economist Jackson warned that the underlying structural imbalances in the economy remain largely unaddressed.

The paths to lowering inflation and stabilising the current account are coming into conflict with the current level of domestic activity.

Cost of rebalancing

To achieve true macro-stability, Jackson argues, Turkey’s economy will require both a weaker currency and a significant slowdown in domestic demand. However, engineered slowdowns are politically delicate – Turkey’s next national elections must take place no later than May 2028 – and consumer appetite has proven resilient, keeping inflationary pressures elevated.

“The trade-off facing policymakers between reducing inflation and restoring external balance is getting starker," Jackson noted, adding: “The economy requires a weaker lira and weaker domestic demand, which we think will keep growth softer than most expect.”

Lira adjustment

In Jackson's eyes, if domestic demand fails to cool sufficiently, current policy settings will become unsustainable. A persistent current account deficit alongside elevated spending raises the likelihood of a sharper adjustment.

“If demand doesn’t slow, the risk of a more disorderly lira adjustment will rise,” Jackson warned, pointing to the delicate balance Turkish monetary and fiscal authorities must strike in the months ahead.