Turkish manufacturing in worst slowdown since May 2020

Reuters/Umit Bektas

• Manufacturing has dropped as inflation has continued to rise
• Price increases across transportation, housing and food and beverages
• Business costs are making it difficult for firms to price competitively 

Turkey’s manufacturing sector slowed for the eighth consecutive month in October, experiencing its most precipitous drop since May 2020.

Analysts see no end in sight for the country’s inflation problem, which is weighing down manufacturing and the wider economy.

The Istanbul Chamber of Industry Türkiye Manufacturing Purchasing Managers’ Index (PMI), compiled by ratings agency S&P Global, found that new orders and production have both slowed, manufacturing firms have scaled back their purchasing activity and hiring has waned.

From a baseline of 50.0, Turkish manufacturing PMI dipped to 46.4 in October, “signalling a solid moderation in the health of the sector,” said S&P Global.

Delivery time has shortened for Turkish manufacturers due to a lack of demand, and new orders and exports have experienced a “sharp slowdown”. 

• Turkey’s central bank hikes 2022 inflation forecast to 65.2%
• Turkey bankers say ballooning debt poses long-term risks
• Erdogan hopes policy rate will fall to single digits by year-end

Global macroeconomic conditions have a role to play in the Turkish slowdown.

Andrew Harker, economics director at S&P Global Market Intelligence, said: “Subdued demand conditions kept the Turkish manufacturing sector on the back foot in October, with weakness in international demand increasingly to the fore.” 

“With requirements to satisfy new work easing, firms looked to scale back both employment and purchasing activity, the latter providing some respite for suppliers and enabling them to speed up their deliveries to the greatest extent in just over eight years, thus lessening one of the obstacles to growth in the sector.”

Speaking with AGBI, Harker said: “Looking at the historical relationship between the Turkey Manufacturing PMI data and official industrial production data, the latest figures suggest that industrial production was broadly unchanged year-on-year in October.”

This has implications for the struggling Turkish economy, he explained.

“We can therefore say that the post-pandemic recovery in industrial production has lost steam in recent months and the sector overall isn’t currently contributing much to wider economic growth.”

As manufacturing has dropped, inflation has continued to rise. Turkey’s latest figures, released in early October, revealed an annual Consumer Price Index (CPI) change of 83.5 percent, and a monthly rate of 3.08 percent.

Transportation, housing, household items and food and beverages increased in price at a faster rate than the wider economy. Transportation alone has more than doubled in price in the last year, with an annual CPI increase of 117 percent.

This has serious implications for the country’s manufacturing sector — some of which have already been realised in its slow decline.

Harker said: “Inflationary pressures have been a key factor listed by companies as having caused moderations in output and new orders for some time now, and this continued in October. 

“While business costs aren’t rising as quickly as they have over much of the past two years, they are still adding to difficulties for firms to price competitively and thus stimulate customer demand.”

The Turkish Central bank’s experimental monetary policies are widely seen as one driver of the country’s inflation, spooking foreign investors and causing a steep decline in the value of the Turkish lira.

Amid geopolitical unrest and global economic turmoil, the Turkish Central Bank, in its most recent inflation report covering October, said inflation was projected to be 65.2 percent by the end of 2022, and would “remain on a downward trend by falling to 22.3 percent by the end of 2023 and 8.8 percent by the end of 2024.”

President Recep Tayyip Erdoğan signalled in September his intention to push for further interest rate cuts in pursuit of economic growth.

Ali Metwally, Mena economist and risk analyst at Infospectrum, told AGBI: “Growth will likely reach 5.1 percent in 2022, before declining to 3.6 percent in 2023. Exporting companies in the Turkish industrial sector are being affected by weak external demand, which is a result of high inflation and tighter credit controls.”

Erdogan’s government is likely to prioritise growth to help it in upcoming elections, he explained. It has begun doing this already by launching a large social housing project and subsidising loans to small traders.

Metwally said: “These [pro-growth policies] will support growth into next year, but are unlikely to make growth higher than this year. Also, some of the policies may be reversed after the elections, especially if the weak external demand and high inflation put more pressure on the lira.”

He sees no end in sight for Turkey’s inflation problem, predicting 30 percent inflation throughout 2023 as “domestic producer costs are still to be fully reflected in consumer prices.”Metwally also warned that “negative real interest rates will likely remain — the Central Bank of Turkey resumed cuts in August.”

The lira, he added, is “likely to come under pressure again”.