Turkey’s Growth Slows Sharply and Labor Market Struggles

Turkey’s economy is losing momentum. In the first quarter of 2025, annual GDP growth slowed to just 2%, down sharply from 5.1% in 2023 and 3.2% in 2024. The four-quarter average now stands at just 2.4%, less than half of Turkey’s historical growth norms. Quarterly growth has also shown increasing volatility, signaling a lack of steady momentum across sectors.

Behind the modest topline figure lies a deeply fractured economy.

Unemployment officially stands at 8.6%, but the broader measure of underutilized labor, which includes discouraged workers, part-timers seeking full-time jobs, and those marginally attached to the labor force has surged to 32.2%. This reflects widespread hidden joblessness and chronic underemployment, particularly among youth and women.

Inflation remains a central pressure point in Turkey’s economic landscape. Although official data show some moderation from past peaks, annual inflation still stood at 35.4% in May 2025, one of the highest rates among G20 countries. This comes after years of persistently high inflation, surpassing 85% at its peak in late 2022, which has deeply eroded real incomes. The inflationary environment has not only exacerbated social inequality but also undermined monetary policy credibility. Despite interest rate hikes under the new economic team, inflation expectations remain unanchored, limiting the effectiveness of stabilization efforts.

A Lopsided Recovery

Sectoral breakdowns reveal further cause for concern. In the first quarter, construction grew by 7.3%, propped up largely by post-earthquake (following February 6, 2023) rebuilding in the south. Yet, this momentum masks stagnation elsewhere. Industry shrank by 1.8%, and agriculture contracted by 2%.

This is not the kind of growth story the country needs. The growth figures point to Turkey's structural distortion. Productive capacity is not expanding, and investment in machinery and equipment has either stalled or declined, while fixed capital formation is concentrated in concrete-heavy sectors. Much of this investment lacks long-term productivity-enhancing potential, especially in tradable or technology-intensive industries.

This pattern mirrors earlier episodes in Turkey’s economic history, such as the early 2010s, when construction-led growth produced temporary booms but failed to address external imbalances and productive capacity.

The reliance on construction raises questions about Turkey's long-term structural prospects. Rather than driving innovation or export competitiveness, recent growth has leaned on a short-term infrastructure boom. This not only distorts capital allocation but also leaves the economy more vulnerable to interest rate shocks and exchange rate volatility.

Financialization over Fundamentals

At the heart of this imbalance lies Turkey’s persistent commitment to a neoliberal policy model, currently steered by Finance Minister Mehmet Şimşek. This model has systematically undermined real wages, weakened labor protections, and exacerbated income inequality.

Turkey is firmly embedded in the global trend of extreme financialization. This refers to the increasing dominance of financial motives, financial markets, and financial institutions in shaping economic outcomes, often at the expense of labor and production. In Turkey’s case, the emphasis on attracting portfolio inflows has prioritized short-term capital over long-term industrial development.

This has created a perverse incentive structure where speculative gains outperform productive investment. As a result, workers have faced stagnant wages amid rising costs, while corporate interests and financial elites have captured a disproportionate share of economic gains. Labor force participation rates remain low, and real wage growth is not keeping pace with inflation.

Current policies have favored capital concentration over broad-based opportunity. As a result, purchasing power is eroding, and household insecurity continues to rise.

With a career built in international finance and treasury roles, Şimşek’s expertise is heavily market-oriented. Yet, the country’s current challenges demand deep structural reform, industrial capacity, quality employment, and public investment, requiring a broader economic toolkit.

Rethinking Growth Beyond the Numbers

Even high growth rates alone do not guarantee progress. Turkey’s recent experience underscores a deeper truth: without attention to the composition and distribution of growth, headline figures can obscure long-term vulnerabilities.

It is critically imperative to get the right message through details. Only then can policies be shaped to form a sustainable and inclusive growth trajectory. Politically motivated statements mislead the public understanding of sectoral performance, labor dynamics, and investment trends. As a result, policy responses risk being misdirected or delayed.

In this context, the pressing question is no longer how much the economy grows, but “how” and “for whom.” A model based on low-value-added construction and speculative finance cannot deliver the structural transformation Turkey needs.

What is urgently required is a strategic pivot toward industrial renewal, science-driven innovation, and equitable development. Turkey must prioritize education, technological capacity, and green infrastructure over short-term stimulus and capital inflows. Without this reorientation, Turkey’s economy may remain vulnerable to external shocks and miss opportunities for sustainable transformation.

The Illusion of Resilience

While officials claim that the data signal stability, underlying fragilities are growing. The labor market is failing to absorb the working-age population. Manufacturing remains stalled. Turkey’s investment composition is drifting away from productive sectors.

With machine and equipment investment slowing and inflation still elevated, the path forward looks precarious. Without a strategic shift toward inclusive growth, innovation, and industrial development, Turkey risks locking itself into a cycle of stagnation and inequality that will be increasingly difficult to escape.