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Turkish business conditions show tentative signs of improvement

Inflation in Turkey stood at 61.36% in October and is expected to peak in May 2024 at around 70-75% Reuters/Cagla Gurdogan
Inflation in Turkey stood at 61.36% in October and is expected to peak in May 2024 at around 70-75%
  • Manufacturing growth welcomed after February earthquakes
  • Supply chain disruption easing
  • Turkey continues to grapple with soaring prices

The embattled economy of Turkey took tentative steps towards a recovery in March, led by an increase in manufacturing and the first growth in new orders in a year-and-a-half.

However, the effects of February’s devastating earthquakes, which killed more than 52,000 people in Turkey and Syria, are continuing to cause disruption, according to the Istanbul Chamber of Industry Türkiye Manufacturing purchasing managers’ index (PMI) survey data.

The country’s headline PMI rose to 50.9 in March from 50.1 in February to signal a modest monthly improvement in business conditions in the manufacturing sector.

A score above 50 indicates economic growth and the latest results showed operating conditions strengthened to the greatest extent since December 2021.

Export orders also rose for the first time in a year.

Andrew Harker, economics director at S&P Global Market Intelligence, said: “Renewed output growth in the Turkish manufacturing sector was a welcome development in March following the marked impact of the earthquake in February.

“Although some firms were still affected, the start of reconstruction efforts supported the overall return to growth. 

“With new orders also up, we are hopefully seeing an end to the conditions experienced by firms over the past year or so.”

Despite the increase in production, employment dipped for the first time in five months, in part due to the earthquake but also as a result of the new early retirement law, which effectively eliminated the retirement age in the country.

The report revealed there were some signs of capacity pressures emerging as the rate of depletion in the backlog of work was the softest in 13 months.

Both input costs and output prices rose sharply again in March amid higher raw material costs, currency weakness and increased wages. In both cases, however, the rate of inflation eased from February.

There were also signs of supply-chain disruption lifting. Lead times lengthened for the third month running, but with the amount of earthquake-related disruption easing since February the rate of deterioration in vendor performance was marginal.

S&P Global Ratings revised its outlook for Turkey to “negative” from “stable” on Friday, citing vulnerabilities from the country’s low policy rates, directed lending and regulatory control on its foreign currency positions and interest rates.

The country continues to grapple with soaring prices of goods and services.

The effects of the earthquake are expected to keep inflation elevated in the run-up to the presidential and parliamentary elections on May 14.

Turkey’s central bank cut its main interest rate to 8.5 percent in February to cushion the impact of the earthquake on its economy.

“Given Turkey’s elevated current account deficits, limited usable reserves, high inflation and reliance on occasional capital inflows, the outlook for the exchange rate remains, at best, uncertain,” S&P said in a statement.

The country’s domestic producer price index was up 0.44 percent month-on-month in March for an annual rise of 62.45 percent, according to data from the Turkish Statistical Institute.

Turkey’s annual consumer price inflation dropped to 50.51 percent last month, slightly below forecast and easing ahead of May’s elections.

Inflation has been stoked by a currency crisis at end-2021 that pushed it to a 24-year peak above 85 percent in October, before dipping with a favourable base effect to 55.2 percent in February.

March consumer prices rose 2.29 percent from the previous month.

These were led by the restaurant and hotel sector which surged 70.7 percent year-on-year, closely followed by a 67.9 percent rise in food and non-alcoholic drinks prices.

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