Outlook:  Turkey’s Domestic Demand Strengthens as Manufacturing Output Remains Weak

Business confidence rises while capacity utilization stagnates

Recent October data from Turkey’s Business Tendency Survey (BTS), Capacity Utilization Rate (CUR), and Sectoral Confidence Indices (SCI) point to a mixed picture in the economy: while retail activity expanded, the manufacturing sector showed no clear recovery trend.

Despite persistent weakness in output, the number of firms citing demand conditions as the main limiting factor declined. Meanwhile, the indicator for registered domestic market orders rose again, diverging positively from its long-term average — suggesting that domestic demand remains resilient despite official claims of disinflationary momentum.

Firms increasingly cited financial constraints, labor shortages, and limited raw materials or equipment availability as major obstacles, replacing weak demand as their primary concern compared to the previous quarter.

Confidence indicators rise in retail, fall in construction and services

The Real Sector Confidence Index (seasonally adjusted) increased by 1.2 points to 102.0, reaching its highest level since March 2025, although it remains below its historical average — signaling ongoing fragility in manufacturing. All components except “total orders in the past three months” contributed positively.

Among sectoral indices, retail confidence rose strongly by four points, hitting its highest level since April, supported by better assessments of sales in both past and upcoming three-month periods. In contrast, construction confidence fell sharply by 4.7 points, driven by worsening expectations for orders and employment, while the services index posted a mild decline, returning to its third-quarter average.

Capacity utilization stuck below trend, led by slowdown in food industry

The Capacity Utilization Rate (CUR) rose marginally by 0.2 points in October to 74%, marking two consecutive months of modest increases. Yet the rate remains below the averages for the first quarter (by 1 point), 2024 (by 2.2 points), and the long-term norm (by 2.3 points).

Sectoral breakdown shows a temporary rebound in the automotive industry, where CUR rose by 4.4 points, reflecting ongoing recovery after summer maintenance shutdowns. However, excluding automotive, manufacturing utilization remained flat since July.

The food sector, which carries the largest weight in the index, continued to drag overall performance. CUR dropped 1.1 points to 71.1%, the lowest level since February 2021, following a 1.2-point decline in September. Weakness also persisted in textiles, apparel, and machinery, where utilization remains well below historical averages.

Production volume weak, domestic orders firm

According to the Business Tendency Survey, reported production volumes fell markedly in October, staying nearly 9 points below their long-term average, mirroring the weak CUR trend.

Domestic market orders, however, continued their upward trajectory — rising for the third consecutive month and surpassing the historical mean. Export orders dipped slightly from September’s strong level but remained near this year’s average. Small-sized manufacturers experienced the sharpest decline in export orders, while mid-sized firms showed partial recovery.

Employment expectations reached a seven-month high, though overall sentiment remains weak. Investment intentions were broadly unchanged from September, with small firms posting stronger gains while medium-sized firms saw a decline.

Cost pressures moderate, PPI expectations ease

Average unit costs declined in the past three months, though expectations for future cost increases edged slightly higher. Manufacturers’ 12-month Producer Price Index (PPI) inflation expectations fell by 0.2 points to 34.3%, still well above the current annual PPI rate of 26.6%.

The share of firms reporting demand shortage as a constraint continued to decline — signaling that output gap perceptions among manufacturers do not align with the central bank’s disinflation narrative. Instead, more firms pointed to financial and labor constraints as production bottlenecks, both above long-term averages.

Competitive dynamics: losses in EU, gains in non-EU markets

On competitiveness, firms reported a slight loss of market share within the EU, particularly in intermediate and durable goods, while noting gains outside the EU, especially in nondurable and investment goods sectors.

These findings suggest Turkey’s export competitiveness remains geographically uneven — pressured in Europe by costs and exchange rates, yet improving in emerging markets where price sensitivity is higher.

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