Having contracted sharply as a result of the global crisis in 2008-09, the Turkish economy has recovered strongly, reflecting base effects as well as a surge in domestic demand supported by low real interest rates and a reversal of the de-stocking recorded in 2009. However, as base effects become less favourable, the impact of stockbuilding diminishes and external demand softens again after the pick-up in the first half of 2010, we expect the pace of growth to ease going into 2011. As a result, GDP growth is forecast to slow from an upwardly revised 8% in 2010 to 5-5.5% in 2011-15, although this will be weaker than the average of about 7% in 2003-07. Growth is forecast to be mainly driven by domestic demand, although as external demand picks up in the second half of the forecast period we expect it to be more balanced between external and domestic demand.

After declining moderately in 2008-09, private consumption has recovered strongly, helped by exceptionally low real interest rates and a strong pick-up in credit growth. Although unemployment is expected to remain above pre-crisis levels and wage growth is likely to be moderate in real terms, some employment growth and still low interest rates (even taking account of our forecast that the Central Bank raises them in 2011-12) are expected to continue to support household spending growth, which we forecast will average 5-5.5% a year in 2011-15.

In 2010 the government curbed public spending, resulting in a sharp deceleration in government consumption growth from 7.8% in 2009 to an estimated 0.5% in 2010. However, we expect the government to loosen the purse strings to some extent in the first half of 2011, pushing up public consumption growth to 5% for the whole year. In 2012-15 we forecast a moderate deceleration to 4-4.5% per year as the government tightens fiscal policy moderately to reduce the budget deficit.

Following a collapse in 2008-09, gross fixed investment has rebounded in 2010. Growth is expected to moderate in 2011 owing to base effects and softer external and domestic demand growth but this is likely to be partly offset by some government spending on construction projects ahead of the election. In 2012-15 we expect moderate domestic demand and the need to replace old machinery and equipment to sustain annual growth of about 7-7.5%.

In 2009 a sharp fall in exports of goods and services was offset by an even larger contraction in imports, reflecting weak domestic demand. Owing to a rebound in domestic demand and only a moderate recovery in Turkey's main export markets (the EU and Russia), this trend was reversed in 2010. As a result, the foreign balance is estimated to have reduced GDP growth by 4-4.5 percentage points. We forecast that this trend will continue as the impact of the euro area crisis is likely to dampen demand in Turkey's main European markets during most of the forecast period to 2015, although we expect a moderate strengthening of demand in the EU and a continued focus by Turkish companies on more dynamic Middle Eastern markets to lift the pace of export growth gradually in 2012-15.

There are downside risks to our GDP growth forecasts. Demand for Turkish exports may be weaker than we expect (especially if the lira appreciates again sharply against the euro). Also, stable economic growth requires Turkey to be able to finance a large current-account deficit and substantial external debt repayments. Currently, capital inflows are fuelling robust domestic credit growth, which combined with real lira appreciation, also driven by capital inflows, has increased the current-account deficit (to around 6% of GDP in 2010). Private-sector debt is relatively low at around 40% of GDP and capital inflows are ample. However, if private-sector debt levels continue to rise sharply and the current-account deficit is still large in two to three years, a decline in global liquidity could cause severe problems, including a fall in the value of the lira leading to, as it has done in the past, higher inflation and an abrupt tightening of monetary policy followed by a sharp slowdown in economic activity with possible private-sector debt-servicing difficulties.

Download the numbers in Excel