Macro Analysis: Geopolitical Risks Weigh on Manufacturing as External Demand Weakens

April survey data indicate that geopolitical tensions continue to dampen external demand and weigh on Türkiye’s manufacturing sector. While overall activity shows signs of softening, investment and employment trends remain relatively resilient, with notable divergence across sectors.

External Demand Under Pressure

April results from the Business Tendency Survey suggest that geopolitical developments are negatively affecting manufacturing, primarily through weaker export orders.

However, when viewed over the past two months, the broader impact appears contained, with domestic factors showing relative stability.

Investment goods sectors—particularly automotive and other transport equipment—have provided some support to overall manufacturing activity. In contrast, intermediate goods linked to construction and non-durable consumer goods such as textiles and apparel continue to show weaker performance.

Energy Costs Sustain Cost Pressures

Persistently high energy prices are keeping cost expectations elevated.

Despite rising uncertainty, there has been no sharp deterioration in investment or employment trends, suggesting that firms are maintaining a cautious but stable outlook.

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Business Confidence Continues to Decline

The Real Sector Confidence Index (RSCI) extended its decline in April, though at a slower pace compared to March.

• The index fell by a total of 5.5 points over the past two months
• It dropped to 98.6, the lowest level since June 2025
• It remains nearly 5 points below its long-term average

This indicates a continued weakening in business sentiment within the manufacturing sector.

Capacity Utilization Remains Subdued

Capacity Utilization Rate (CUR) has remained flat at 74% for the past three months, staying below historical averages.

By firm size:

• Small firms saw a notable decline, with CUR falling to 67.1%
• Medium-sized firms remained stable at 70.8%
• Large firms declined slightly to 77.2%

These figures point to ongoing weakness in production activity.

Sectoral Divergence Becomes More Visible

Sector-level data reveal increasing divergence:

• Machinery and equipment, along with tobacco products, recorded the sharpest declines
• Automotive and transport sectors showed some recovery, though not enough to offset earlier losses
• The food sector continued its gradual improvement
• Textile and apparel sectors reversed previous gains and weakened again

Construction-related industries broadly underperformed, while basic metals saw limited gains.

Mixed Signals from Demand Indicators

Production volumes declined modestly over the past three months, while finished goods inventories increased. This suggests that output has not yet fully adjusted to weaker demand conditions.

On the orders side:

• Export orders showed a limited rebound after a sharp drop in March
• Domestic orders declined more moderately

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Employment and Investment Trends

Employment trends have gradually weakened over the past three months.

Investment sentiment has shown a slight improvement, but remains below earlier levels.

By category:

• Durable goods sectors saw declines in both employment and investment
• Medium-sized firms reported increased employment
• Small and large firms showed some improvement in investment activity

Outlook: External Weakness Persists

Expectations for export orders continued to deteriorate in April following the decline seen in March.

While domestic demand expectations showed some improvement, they remain below previous levels.

This suggests that geopolitical uncertainty continues to weigh on external demand conditions.

Rising Cost and Inflation Expectations

Cost pressures remain elevated due to rising energy prices.

• Producer price inflation expectations increased from 31.1% to 31.9%
• Firms anticipate tighter financial conditions, particularly in terms of Turkish lira borrowing costs

Demand Constraints Easing Slightly

Despite declining orders, the share of firms citing insufficient demand as a constraint on production has decreased.

Additionally:

• Raw material and equipment shortages remain below historical averages
• Labor shortages have eased slightly but remain elevated
• No significant change in competitiveness has been observed despite continued real appreciation of the Turkish lira

Overall Assessment

The data point to a manufacturing sector under pressure from geopolitical risks and weakening external demand.

However:

• Investment and employment have not deteriorated sharply
• Sectoral divergence is pronounced
• Domestic demand remains relatively resilient

This suggests a slowdown rather than a full contraction in manufacturing activity.

Source:  Akbank Economic Research