Broad-Based Slowdown Signals Emerge in Turkey’s Second-Quarter Economic Activity

Recent data from Turkey’s Economic Tendency Survey, Real Sector Confidence Index (RSCI), and Capacity Utilization Rate (CUR) for May indicate a continued weakening in both demand and production within the manufacturing sector, with signs of a broad-based slowdown across multiple industries. The Central Bank of Turkey (CBRT)’s latest output gap estimates reinforce this outlook, pointing to sub-potential quarterly growth.

Confidence Indices Show Widespread Weakness

The seasonally adjusted RSCI fell by 2.2 points in May to 98.6, remaining below its historical average. The decline was driven by a drop in current and expected total orders, as well as weaker export demand and increased inventories. The deterioration reflects growing volatility and uncertainty from both domestic and global developments since March.

Sectoral confidence indices, which had improved in Q1, suffered steep drops in April and only marginally recovered in May. The services sector index rose by just 1 point to 110.5, while retail confidence edged up by 0.6 points. The construction sector saw some improvement, but all three indices remained below their historical averages, signaling a general loss of momentum across economic activities.

Capacity Utilization Still Below Average

The seasonally adjusted capacity utilization rate (CUR) rose by 0.5 points to 75.1% in May, still 1.2 points below its long-term average. The weakness was most evident among small-scale firms, whose CUR dropped to its lowest level since December 2020. Medium-sized firms also continued to underperform, while large firms remained just slightly below average.

By sector, the main metal, automotive, and apparel industries showed CUR increases, while textiles and machinery experienced notable declines. Notably, the textile sector dropped below the 70% mark for the first time in two years, and the machinery sector fell to its lowest level since September 2020.

Production, Orders Flat; Inventories Build Up

The Economic Tendency Survey showed that production volumes stagnated in May after a decline in April, remaining nearly 7 points below the long-term average. Durable consumer goods experienced a significant decline, while intermediate and capital goods saw limited gains.

Inventories increased across all product categories, especially among capital goods and large-scale firms. Still, inventory levels remained below historical averages for all categories except capital goods.

Domestic Demand Recovers Slightly, Exports Remain Weak

Domestic orders rose in May after falling in April, pushing above historical averages and hinting at a modest rebound in internal demand. However, export orders continued their three-month slide, remaining well below average.

Durable goods saw a steep decline in domestic orders, while investment and non-durable goods posted gains. In external markets, intermediate goods exports rose, whereas investment goods fell.

Mixed Trends in Employment and Investment Outlook

Employment expectations improved in May across all firm sizes, but the longer-term trend remains downward. Durable goods manufacturers reported job cuts, while other segments posted modest improvements.

Investment intentions, however, have been declining for four straight months. The outlook worsened especially for medium-sized firms and in the investment goods category, while non-durable and intermediate goods posted mild gains.

Weak Expectations in Orders, Costs, and Prices

Both domestic and export order expectations have been falling below long-term trends, with May data showing no sign of recovery. Price and cost expectations for the next three months also declined.

Meanwhile, the 12-month forward PPI inflation expectation in the manufacturing sector dropped by 0.5 points to 38.4%, which remains significantly above the current annual PPI rate of 22.5%. This suggests that inflation expectations remain elevated, likely due to concerns over commodity prices and exchange rate volatility.

Conclusion: Turkey’s Economy Cools in Q2

In summary, the latest economic indicators point to a broad-based slowdown in Turkey’s economic activity during the second quarter of 2024. Weak production, falling orders, subdued capacity utilization, and cautious investment outlooks are all converging to paint a subdued macroeconomic picture. The CBRT’s output gap projections support this narrative, signaling a continued growth performance below potential.

Source:  Akbank Economic Research

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