0207 GMT July 16, 2019
Stung by high living costs and a 2018 currency crisis, voters handed the AKP one of the party's worst setbacks after a decade and a half in power, AFP reported.
The ruling party suffered an upset in mayoral elections after results showed that it lost the capital Ankara and was narrowly defeated in Istanbul.
Now with no elections until 2023, Erdogan has room to focus on the economy, but analysts say he must convince investors already wary over his policies.
Finance Minister Berat Albayrak has said Turkey will enter "an economic rebalancing period" after the elections and he is set to reveal reform details this week.
Albayrak is due to meet IMF and World Bank officials in Washington on April 12-14 to "shed light on the new roadmap" for Turkey's economy, according to the Daily Sabah newspaper.
The AKP built its success on Turkey's strong growth and his supporters point to progress in living standards during Erdogan's 16 years in office.
But Turkish households were stung last year by a 30 percent slide in the lira during a diplomatic crisis with the US.
Overshadowing Turkey's economic outlook will be Erdogan's testy relations with the United States, which are already frayed by disputes over Syria, Turkey's Russian missile purchases and its arrests of US diplomatic staff.
When a dispute erupted last year over Turkey's detention of a US pastor, Washington swiftly imposed sanctions and tariffs on some Turkish goods, triggering the slide in the lira.
Turkish officials defend the central bank's independence, but Erdogan has demanded it lower interest rates, which he blames for high inflation. That worries investors who see political pressure on bank policymaking.
The Turkish president has also lashed out at foreign investment banks, and blamed recent currency fluctuations on part of a US-led attempt to "corner" Turkey financially.
Turkey's government has said it will go ahead with a purchase of Russian S-400 missiles, despite Washington suspending Ankara's participation in the US-made F-35 fighter jet program and warning of more sanctions to come.
Once the darling of emerging market investors, economists say Turkey has lost some of its appeal as problems emerged with growth driven by foreign credit.
The country has slipped into recession for the first time in a decade, inflation is in double digits and economists are watching how Turkish officials will manage its recovery.
Turkish officials have in the past talked up broad reforms, including a tax overhaul and measures to strengthen growth. But a major worry, analysts say, is foreign debt exposure for Turkish companies, which face more costly repayments for foreign lending because of the weaker lira.