Macro and Politics

* Turkey’s economy grew by 1.6% in sequential terms and 4.8% on annual basis in 2Q25. Our house forecast as well as the market median according to the ForInvest survey, had anticipated annual growth of 3.8%. Moreover, growth data for 1Q25 were revised to 0.7% q/q from 1% and 2.3% y/y from 2%. The acceleration in annual growth was largely driven by base effects from the previous year, while revisions in the Turkish National Accounts System also contributed significantly to the divergence between market expectations and the realized figures. Despite changes in calculation system, the robust growth outcome poses potential risks to the disinflation process. It’s worth noting that the CBT noted in its 3Q25 Inflation Report that “preliminary indicators point to a slowdown in domestic demand in 2Q25 and an increase in the disinflationary effect of demand conditions.” However, today’s release partially contradicts this assessment. Accordingly, we view today’s robust GDP figures as potentially prompting a reassessment of the current monetary policy stance. We maintain our full-year GDP growth forecast at 3.1%, while acknowledging that today’s data have increased upside risks to our projection.

* The Istanbul Chamber of Industry (ICI) Turkey Manufacturing PMI rose to 47.3 in August from 45.9 in July, marking its first increase since January and reaching its highest level since April. Yet, the index continues to remain below the 50-threshold since April 2024, signaling a continued contraction in manufacturing activity. Key takeaways from the August reading include: (i) weaker moderations in output and new orders, (ii) sharpest scaling back of workforce numbers since April 2020 and (iii) output price inflation at eight-month low. At the sectoral level, only one out of ten sub-sectors—the basic metals industry (50.5)—registered expansion in August, while the remaining nine sub-sectors continued to contract. Hence, the sectoral PMI survey further highlights the persistence of challenging demand conditions. Although the leading indicators for 3Q25 remain limited, indicators so far suggest a modest slowdown on an annualized basis relative to the previous quarter. The sharp acceleration in industrial sector activity observed in 2Q25 (+6.1%) was largely driven by a low-base effect and changes in calculation system. Accordingly, we expect this effect to moderate in 3Q25, thereby revealing a more pronounced weakness in the industrial sector trend.

*Based on our calculations using the CBT’s analytical balance sheet, we estimate that during the week of August 22 – 29, net international reserves surged by USD1.9bn to USD73.6bn, returning to pre-19 March levels, while gross FX reserves climbed by USD2bn to a new record USD178.5bn. We anticipate that the official reserve data, to be released on Thursday, will likely reflect a similar rise in line with our estimates.